Is Gold Just Breaking Out, Or Ready To Break Down?

 |  Includes: GLD
by: optionMONSTER

By Bryan McCormick

The SPDR Gold Trust (NYSEARCA:GLD) exchange-traded fund has become a proxy for physical gold, and today I want to consider what has been happening with this particular asset.

The included chart shows the GLD over a three-year period with weekly candlesticks. I have been using it for study since early 2010. The diagonal orange line is a linear regression line drawn through the trend from 2009 to early 2010, which has then been projected forward. This allows me to follow how price was behaving around the established uptrend. As you can see, it has hugged that line quite closely for almost three years, until the markets more broadly began to turn down in late June.

There has been a large movement away from that trend line since July, when it made the biggest gain in years. As we can note from the behavior of price around the line, it has a tendency to oscillate around it. Gaps above the line are often then deflated, and result in tests on the other side of roughly the same size. This line has been like a magnet for price, without exception, and drawn it back to trend after brief surges or dips. We could be seeing the start of that magnet effect now with prices coming in from the recent highs.

The significant technical event of today was that price broke below the 10-day moving average on the daily chart. I am not showing that here, but the 10-day was last at $175.73 and is now resistance. That is for now a big technical negative as long as price remains below the 10-day.

So what is the downside risk potential? If price retreats down to the regression line over the next couple of weeks, the target price would be from $151 now, to $154 over the next month or so. That would be close to the 10-month moving average which has been uptrend support since the start of 2009, last at $146.12. That is a big potential change in price from peak, but it would not be atypical price behavior to see mean reversion over time take place. If price were to test under the line, a downside move equal in scale to the up move above the line could see price come down to $120 before a possible rebound.

Much depends now on whether the ETF retakes or hugs closer to the 10-day moving average. The more stable price is around the 10-day, the better the chances are that a new range has been established and a new trend as well. That will take time to evaluate. For now traders need to be aware of the potential risk and monitor price and its relationship to the long-term trend very carefully.

gld chartClick to enlarge

Chart data courtesy of Thomson Reuters.