GLD: A Very Dangerous Set Up

| About: SPDR Gold (GLD)
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There are many "key factors" followed by market participants.

These "key factors" have not provided accurate and consistent directional cues for gold.

Upcoming week's expectations.

The Ukraine. Unemployment numbers. Quantitative easing. To "taper" or not to "taper." Chinese demand. Indian demand. Manipulation. Comex gold inventories. GOFO. These are all supposed factors many claim are the "key" to the gold market and, as you can see, these "keys" are quite numerous. Does this not leave your head spinning in trying to determine what to watch? It begs the question "was the rally on Friday due to the Ukraine or the jobs number?" And, how do you make such a determination? And, if you claim it was one or the other, I would like to know how you objectively prove such a thesis.

When I review the numerous articles which have recently come out on Seeking Alpha on the metals, they all address at least one of the factors I noted above and claim they are the "key" to gold's next big move. But, the first problem with this is that none of these "key factors" have been able to foretell which way gold is headed next with any form of consistent accuracy for the last 3 years. Worse yet, they have often provided misdirection as gold moved in the exact opposite way most would have believed based upon these "key factors." And, although we have not had the Ukrainian issues around for 3 years, we have had other world conflict issues that many thought would move the metals (Syria, for example), which ultimately turned out to be of no consequence at the end of the day.

Moreover, one author even noted that the Ukrainian issues would cause gold to rise, and then, two days later, noted that gold inventories suggest gold will go down. It reminds me of another author who opined that gold is about to move up "10-20% within the next week" due to Ukrainian issues, only to see gold drop strongly immediately thereafter and then come out with an article several days after the first saying it is time to get out of gold.

So, when I read these articles, it leaves me with questions of how much will gold move and how the heck does one trade a direction with this type of conflicting perspective? Rarely will I see an author provide directional perspectives based upon specific levels in the market, and I will almost never see an author identify when their analysis is to be considered wrong.

The point I am making is not to bash other authors, but to prove that, unfortunately, analyzing these "key factors" will never provide objective and quantifiable answers to the questions we need to ask before we deploy our hard earned money.

When someone trades any instrument or stock, and most specifically something as volatile as gold, would you not want to know your entry, target and stop price before you even enter the trade? Don't you need to know up front when the analysis upon which you base your trade is wrong, rather than letting the market turn significantly against your position? And, can any of these "key factors" really give one an objective point at which they know they are wrong and the market will be heading in a direction contrary to their initial perspective? As we have seen, the same author can come to contrary conclusions simply by looking at two "key" factors, or even the same "key factor." So, which one is right and how confident can you be in putting your money to work based upon analysis of these "key factors?"

Again, it takes me back to watching market sentiment, and the patterns that provide clues as to the directional cues the market leaves behind. And, as I noted last weekend, as long as The SPDR Gold Trust ETF (NYSEARCA:GLD) remains below the 126 region, we have a very dangerous set up to the downside. Specifically, as long as GLD remains below the 126-127.50 resistance region, then the market has provided us with a "set up," which could see a drop of at least $3-4 within a single day.

Remember, not all set ups get triggered, as markets are non-linear beasts. We are only able to trade probabilities, as there is nothing definitive in any market. As a former tax and M&A attorney, we had an old joke that said that nothing is definitive in life other than death, taxes . . . and tax reform. But we must be able to at least recognize the significant potential for such a move before it occurs.

Also, others have noted this past week that the COT positioning of the commercial traders has become quite bearish, and this has not even taken into account the rise we saw on Friday, which likely elicited increased short positioning by these traders. Those that are of the belief that the commercial traders are usually correct in this market have another indication that we will likely see lower levels in the metals in the near term.

Right now, the pattern set up is such that if the GLD is unable to break through the 126-127.50 resistance region in strong fashion, it is set up to revisit the 113-115 region in quick fashion. But, if we are able to move through the 127.50 region strongly, then we are likely heading up to test the 129-131.50 resistance region. And, as I have said numerous times in the past, if we see a strong move through 131.50, then I will be focusing my attention again on the 136-140 region. Although a trip to 136-140 is not my primary expectation at this time, you now have a road map which tells you when and where I am wrong in the event gold does provide us with a strong rally.

Disclosure: I am long SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own intermediate term puts on GLD