Chart Analysis: The sharp reversal on January 4th, when combined with the weak volume pattern, suggested that the metals were ready to decline further as I put out a special daily chart titled “Has Gold Topped?" before the market closed.
Spyder Gold Trust (NYSEARCA:GLD) closed below the key level I was watching at $132.86 last Friday confirming that a daily top was in place.
- The on-balance-volume (OBV) failed to make new highs since November and violated support early this month.
- OBV is now below its declining WMA
- Breakaway gap Thursday is negative
- The 38.2% support is at $129.50 with the 50% support at $126.50
- There is resistance now at $134.50-135.50
- April Comex gold should test the $1285-1310 area
iShares Silver Trust (NYSEARCA:SLV) closed below trend line support a week ago, completing the top formation which has downside targets in the $25.30-50 area and the 38.2% support level.
- The daily on-balance-volume (OBV) formed a significant negative divergence at the early January highs.
- The OBV has broken its uptrend going back to the August lows and is below its declining WMA
- The 50% retracement support stands at $23.75
- Resistance now in the $27.30-28 area
What it Means: Monthly volume analysis confirmed the recent highs for both gold and silver so there is no change in the major trend – it is positive. The daily and weekly analysis does make it very likely that both metals will correct further and we may see a corrective period that lasts for some time. On a short term basis we may consolidate or bounce over the next few days.
How to Profit: I previously recommended selling the March 135 calls in GLD to hedge your long position which should have been filled at around $4.65 on 1/4/11. They closed Thursday at $2.14 and are showing a nice profit. I would expect GLD to eventually test the $126.30-128 area. Therefore would sell the March 130 calls (they closed at $4.50) and simultaneously buy back the March 135 calls to keep your GLD position hedged. Be sure any short call positions are covered by long positions in the ETF as naked call positions are very dangerous and not recommended. SLV should drop at least to $24.30-80 and could hedge long positions in SLV by selling the April 25 calls at $3.55 or better.