GLD: Whipsaw Not Likely Over

Jul.27.14 | About: SPDR Gold (GLD)


Market whipsaw likely to continue.

The lows in the metals are not clearly in place.

Upcoming week's expectation.

More and more analysts are trying to convince people that now is the time to buy gold. Everyone is so sure that the double bottom, or triple bottom - depending upon how you look at it - is a clear indication that the lows for gold have been seen, and we are back into the bull market.

Along these lines, we are seeing more and more articles coming out that suggest that the end of the world as we know it is neigh upon us. These articles are usually written by some form of gold bug, who warns that you must own gold now since it will exceed $10,000 when you wake up tomorrow morning.

More trend traders, who have been some of the worst whipsawed people in the last 3 years, are bullish once again, simply because gold is in a minor uptrend this year. But, I think they will all wind up being on the losing side of this move one more time, even if they wind up being right for the next few weeks.

In my usual perusal of articles on Seeking Alpha, I noticed one article summing up what most articles present as fact: "It looks as if gold will stay in the $1,300/oz range for a little while," and "supply and demand indicates higher prices for gold." So, do most of you really feel we will stay in the 1300 region for a while? I sure don't. And, we have continually heard about strong demand in India and China, yet the market has not really cared as it continued to decline over the last 3 years on such reports.

And, as for the news hounds, well, they saw further escalations in Ukraine and Gaza, yet, gold continued to go down, just as we laid out last weekend. So, I will still suggest something that may simply shock you: ignore the news. In just the last few weeks alone we have seen the metals go up and down on escalation of violence in the Middle East and elsewhere. So, unless you have a crystal ball which will divine in which direction a particular act of violence will cause the metals to move, I suggest you ignore the news, as it will likely get you to look the wrong way.

After calling for market whipsaw 3 weeks ago, the market certainly has not let us down. Last weekend, I noted that "the plan I see going into next week is, as long as we maintain below 127.50, I am still expecting that drop to the 121-123 region. In the "ideal" situation, the market should maintain that region as support, and then rally towards the 130 region into early August."

Well, this past week we did get much closer to my 121-123 target region, as the low we hit was 123.90. And, that could have been all we get. If the GLD is able to exceed the 126 region early next week, then I will be looking for a corrective pullback to signal that we are heading on up to the 130-133 region. But, please allow me to remind you that such a rally, which will likely conclude in early August, is only setting us up for the bigger drop to new lows, and taking us to an ideal target in the 95GLD region by the end of October.

Alternatively, if the GLD is unable to move beyond the 126/126.25 region early next week, then we can still see another loop down to the 121/122 region before it heads higher.

Now, before you think to yourself that my "hocus-pocus" analysis is way off base in looking for lower lows, there are also two further facts that we have seen that support our conclusion for lower lows. First, when we continue to look at the Commitment of Traders report, it is clear that the commercial traders are quite bearish the metals, as they are carrying rather large short positions. That rarely bodes well for big upside moves.

Second, the call to put ratios, based upon volume, are strongly in favor of calls in the metals arena, and that is going all the way out to 2015. That is usually not indicative of a bullish market. Rather, when so many are buying out-of-the-money calls so far out in time, the market rarely rewards these traders with monstrous profits. These options usually expire worthless, or they get stopped out on larger drops, as these out-of-the-money options holders are usually the ones left holding the bag and are rarely profitable.

And, as I have said many times before, I would have to reconsider my expectation if we should see a strong move over the 140GLD region, with initial indications should we be able to break out over 134GLD. Furthermore, should the market drop next week and take us below 121, on our way to the 119 region, then I was clearly wrong in my expectations for the move up to the 130-133 region, and it is an initial signal that we may have begun the drop to lower lows already. And, who am I to argue with the market if it wants to provide me with the gift of lower lows before we complete my "ideal" scenario to take us there. This is why I think all long trades should be taken much more cautiously, at least until the market proves that a long term bottom is in place, which, in my humble opinion, it has not yet done.

Disclosure: The author is long SLV. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I also own intermediate term GLD puts