Expect to See a Short-Term Gold Pullback

Here we are again with another highly anticipated FOMC announcement due out this afternoon and the market is showing signs of strength.

Generally, you can see pre-fed sector leaders emerge post-fed statements. If this rings true today, Technology will lead us down or Basic Materials will lead us higher (weakest vs. strongest in last 5 days). This time it may be more about Gold than anything else, based on Tuesday's breakout traders are betting on signs of inflation. Will the Fed statement later today support or challenge the new record highs in Gold?

On just about any time frame, the SPDR Gold (GLD) is showing a classic technical breakout. At 60-Minute, Daily and Weekly, you can see the classic 'breakout' system (Acceleration Bands) applied to each time frame in the chart below. Later on, you'll see why this move may be better to fade in the short-term, although, the technicals are showing trend strength.

GLD Weekly - Acceleration Bands (click to enlarge)

GLD Daily - Acceleration Bands

GLD Hourly - Acceleration Bands

It's especially intriguing that this occurs the day before the FOMC announcement. Was there a leak of some sort or is this just a risky bet? We've seen similar action ahead of the Fed before.

It's no secret that traders have speculated on economic reports being leaked. It happened most recently with the ISM number, and even the acquisition of Sepracor (SEPR). Just six weeks ago (the last FOMC meeting), I pointed out a large bond trade placed 90 minutes ahead of the announcement.

The large trade was placed on iShares 20+ YR Treasury (TLT) and was presumably a bearish leaning straddle, based on our analysis. The straddle was placed on January strikes, however, and at this time the trade is at a marginal loss. This brings up the age old [rhetorical] question: 'what is smart money or dumb money...and who's better to follow?' At any rate, check out the TLT trade status if you have time, but let's get back to the Gold breakout ahead of the Fed.

After exiting the last leg of a GLD call position last Tuesday, which I'd held for a couple of weeks, Tuesday's Gold breakout was of high interest. Once again, there's another significant move ahead of the Fed Wednesday's announcement -- GLD hit all-time highs after one of the largest daily percentage gains in 2009. In my view, this move was overdone, though it's not worth betting against just yet. For short-term technical traders, you'll notice that most of these breakouts are followed by a settling period or a minor pullback. It will likely be different now. With jobs numbers or Fed speak we are almost assured that Tuesday's action will be analyzed and a strong move will ensue-a correction or further breakout. You might recall my associate Bob Lang, who predicted gold would be up 20% this year to $1200/oz ... so there's likely more upside by year end.

Option traders were net bullish on Tuesday (making it the 4th highest day for GLD options volume on-record) with roughly 3:1 calls to puts. I took a look back at the top five days for option volume on GLD and there seems to be a dependable trend in place -- we're at a short-term top in GLD. The chart shows the most active days for GLD options with 5- and 10-day performance after option volume spikes. Note that in each instance of a record options activity we saw losses five days after and in 4/5 instances we saw losses 10 days after the spike.

In my view, this shows a clear and present trend -- Gold is likely to decline for the remainder of this week and probably next week, too. That said, the longer term weekly trend is too strong to fight so the probable pullback on the horizon should be another great entry for longer-term gold buyers.

Comments

[Roger Knights:]

There are still a lot of trapped shorts, so I don't think there'll be a really sharp pullback in store for gold.

Nov 04 04:13 PM

[market ace:]

You guys that bury yourself in charts need to look up and view the world around you once in a while to see real trends. I read 5 articles on gold today by chartists and the short term predictions vary so much it is hard to believe they are writing about the same asset and using the same charts.

As stated by the previous comment, big US banks doing the govt's bidding to manipulate the price down are getting in serious trouble with their giant shorts. China and now India are setting a bottom price for gold and when the truth comes out about all of the missing gold supposedly held in US and UK vaults and the comex naked shorts gold has only one way to go.

It does not take a genius to now say in the short term there will be a correction as no price goes straight up. I guess traders try and guess these short term gyrations, but anyone investing in gold should be looking at the long term not just tomorrow's price.

Nov 04 05:04 PM

[The Goldfinger:]

ummm, charts...

Nov 04 07:18 PM

[The Recusant:]

I believe that the U.S. banks and foreign central banks are likely influenced by the Fed to do nothing to regulate the price of gold right now. It is in the best interests of the U.S. to keep the dollar, and even other currencies, at a low value to encourage exports and lessen the pressure of debt. Once the employment rate sees a substantial increase, batten down the hatches, because the banks and Fed will use their full power to dim gold's shine. Until then, enjoy the ride.

Nov 04 09:05 PM

[tball:]

Andrew sees the big picture , were talking trends here lets face it when I see the new peak I hit the sell button and sell into strength.You know the profit takers are out there thinking the exact same thing and by doing so create that dip that becomes the next buying opportunity.


On Nov 04 05:04 PM market ace wrote:

> You guys that bury yourself in charts need to look up and view the
> world around you once in a while to see real trends. I read 5 articles
> on gold today by chartists and the short term predictions vary so
> much it is hard to believe they are writing about the same asset
> and using the same charts.
>
> As stated by the previous comment, big US banks doing the govt's
> bidding to manipulate the price down are getting in serious trouble
> with their giant shorts. China and now India are setting a bottom
> price for gold and when the truth comes out about all of the missing
> gold supposedly held in US and UK vaults and the comex naked shorts
> gold has only one way to go.
>
> It does not take a genius to now say in the short term there will
> be a correction as no price goes straight up. I guess traders try
> and guess these short term gyrations, but anyone investing in gold
> should be looking at the long term not just tomorrow's price.

Nov 08 10:05 PM