A Warning For Gold Longs

| About: SPDR Gold (GLD)
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Summary

Gold has recovered 7.5% from the December lows.

It's a nice bounce in a bearish trend, but the move is now at resistance.

What this could mean in the short and medium term.

Every trader has different objectives, risk tolerance and holding periods. 'A Warning For Gold Longs' could be very relevant for a trader who bought the December lows for a swing trade, helpful for anyone who wants to buy gold (NYSEARCA:GLD) now, and absolutely irrelevant for long term holders who plan to hold for years.

With that in mind, I want to warn of the likelihood of a short term pullback. My personal approach was to sell most of my holding above $1200 with the aim to buy it back as low as possible.

This approach may end up backfiring, and I may end up missing any rally. I can accept that, though; I am no gold bug, I am trader, and my only aim is to make money consistently. Selling above $1200 made me money betting against a bearish trend when the probabilities seemed to be shifting against any further gains.

The Warnings

Yesterday gold was +7.5% up from its December low. That's no reasons to sell in itself, but the move has now retraced 38.2% of the post election decline and we are at a point where shorter term traders will start to take profits.

This is what I posted on Twitter yesterday at $1205:

The combination of the 38.2% retrace and the channel high was enough to cause a reaction, and gold eventually fell from $1207 to $1191. That's not much, but I believe this is only the start of the decline.

There is also potential resistance on the weekly chart as we can see a 3 bar move into the 50 week moving average.

This isn't something to fear on its own, but when there is resistance in more than one time frame, the reaction is often more pronounced.

Fundamentals

So far we have identified potential resistance where traders may sell. This is only a technical factor, but this may only be a technical bounce. As I said in my last article,

Many, many markets have started to retrace the move which started on the election. They are all somewhat correlated. So what has fundamentally caused this shift?

If you know, educate me in the comments section, please, as I confess I don't know the answer.

I'm guessing the recent moves are merely technical. Many markets recorded buyer / seller exhaustion signals (I use the Demark sequential indicator), many hit support or resistance. With the holidays approaching, shorter term traders squared positions at technical levels.

In the case of gold, shorts playing the head and shoulders targeted $1117. They were covering into the liquidity provided by the rate hike sell off and some may now be going long on the break of the channel.

If you want to know the fundamental reasons for the moves in gold, I think you will have a hard time unless you look at other correlated markets and understand what is driving gold at this moment in time.

A lot has been written about what drives gold and what it is or isn't correlated with. Much of this is opinion, and I will only say statistics do not lie:

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When you adjust for beta, GLD and USDJPY (NYSEARCA:FXY) are essentially the same thing, with a 200 day correlation of 0.93.

Of course we don't know if or when the correlation will diverge, but at the moment, and especially since the election, GLD is a play on US interest rates and the Dollar. Here is the correlation with the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT):

If you want a fundamental perspective on gold, you must look at what is driving the dollar and rates. It's as simple as that.

Incidentally, I've been trading all three and I think the current moves were all technical. This is a dollar chart from 3rd January.

We didn't hear of any fundamental reasons for why the dollar may drop, but technically the rally looked complete. In Elliott Wave, when a 5 wave move completes, a retrace is always expected.

Ten days later, as the dollar approaches support (note the blue line in both charts), the media narrative flips bearish after Trump's speech / press conference.

If you use fundamentals to make decisions, use them in relation to the technicals, and think one step ahead of what is reported in mainstream media. If you were buying gold (or shorting the dollar) yesterday because of Trump's speech you were likely too late.

Anyway, as the FXY and the dollar have now hit support, and gold is at resistance, I think a reversal in all asset classes is likely. The question is, where will they reverse to?

Downside Targets

I think the next decline in gold will hold the lows for another move above $1200. The retrace is a chance to buy.

At the moment I can't get too specific. My methods rely on real time analysis of price structure; I may draw in potential support levels, but I look at the structure of the decline to judge which is most probable to cause the reversal.

It's very early days, but I'm looking at a first leg to $1170, before a bounce and a second leg lower.

Regular readers will know I've been comparing the current gold moves to those we had after the last rate hike in December 2015. The below chart updates the fractal I first published on 15th December (the day of the low) where I said,

I still see the potential for a gold reversal based on what happened after the last rate hike and the potential support in the $1,117-1,124 area.

The fractal played out very nicely, and if it continues we should expect some sort of retrace and a rally back above the election day highs.

Longer term I still think gold will trade a large range of $1000-$1400 for a number of years and my strategy is to trade the swings.

Conclusions

Gold appears to be completing its first cycle up and is at resistance, just when related markets such as the dollar are hitting support.

The moves appear to be technical in nature, and I believe gold is in the process of bottoming. This means it could retrace as low as $1130 before making a larger recovery.

I will update if and when I buy.

Disclosure: I am/we are long GLD.

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 trade futures. I have a small position with a trailing stop.