Recent price action in gold futures and the major tracking ETFs suggests heightened volatility and further declines, making the risk for new buying prohibitively high now.
The strong surge in gold prices in the latter part of January suggested that the correction from the September 2011 highs was finally over. It is not uncommon for corrections in the gold market to last three to five months, as it normally takes that long for the extremes in bullish sentiment to change.
Bearish sentiment appeared to have bottomed last December, but the sharp drop on Wednesday, apparently in reaction to Ben Bernanke's comments on further easing, suggests traders had quickly become too optimistic.
The long-term analysis of the gold futures and the Spyder Gold Trust (GLD) has been positive for over ten years, and certainly, this drop has not changed the long-term trend.
The severity of the drop suggests that traders, not investors, are dominating the market, so more volatility and lower prices are likely even though prices were trying to rebound early Thursday.
The weekly close will be important, and if it is below the lows of the last four weeks, then further weakness is to be expected. Any positions in the gold miners look especially vulnerable.
Chart Analysis: The monthly chart of the Comex gold futures shows that despite the spike to nearly $1800, prices did close lower in February.
- There is now initial monthly support at $1688 with more important support in the $1523-$1566 area, line a
- Monthly on-balance volume (OBV) turned positive in 2001 and has continued to confirm each price high
- OBV did confirm the last monthly high in September, keeping the major trend positive
- OBV has initial support at line b and its flattening weighted moving average (WMA). A break of this support would suggest that gold's correction is going to last longer
The weekly chart of the Spyder Gold Trust (NYSEARCA:GLD) shows that there is the potential to form a bearish engulfing pattern this week.
- A weekly close below $166 will clearly be a negative sign for the near-term trend
- The 38.2% Fibonacci support of the rally from the December lows to this week's highs has already been reached
- The 50% support is at $161 with the 61.8% support at $158
- The weekly uptrend (line e) and the upper trend line from the triangle formation, line c, are also in the $156-$158 area
- Weekly OBV failed to break out on the recent rally, as it has turned down from resistance at line f
- OBV is now testing its weighted moving average with more important support at line g
The daily chart of the Spyder Gold Trust (GLD) shows the huge drop on Wednesday and the break of support at line b.
- On the daily chart, the next evident support is in the $160 area with more important support between $155 and $157
- Daily OBV turned positive when it broke its downtrend, line e, in late December
- OBV did form a short-term negative divergence this week (line d), and volume was very heavy on Wednesday
- There is initial resistance at $166-$167 with more important resistance at $170-$172
The daily chart of the Market Vectors Gold Miners (GDX) shows that prices have reversed after testing the daily downtrend, line f.
- The chart appears to be completing a continuation pattern, lines g and h, which is consistent with the pattern of lower highs and lower lows
- Key support now stands at $52.69, and a close below this level will have initial downside targets at $49.22-$51.27
- The 127.2% Fibonacci target from the formation is in the $47 area
- The relative performance, or RS analysis, shows a well-defined downtrend consistent with GDX being weaker than the S&P 500
- A break below the RS line's recent lows, line j, will warn of a sharper decline
- The OBV has remained negative throughout the recent rally, as it is still in a downtrend, line k
- There is now initial resistance at $58 with stronger resistance at $60-$61
What It Means: My recommendation last week to buy the Spyder Gold Trust (GLD) and the iShares Gold Trust (IAU) initially appeared to be well timed, as the initial buy levels were very close to the day's lows. I was looking for a move above the November highs to confirm a sustainable uptrend.
The failure at these high is consistent with a drop back to stronger support, but the late-December lows should hold. Therefore, wait for the dust to settle before initiating new buying.
The gold miners look more vulnerable, and despite their attractive yields, a further decline of 5%-10% from current levels is not worth the risk on positions established in the past two months. Therefore, use very tight stops on existing positions in the gold miners.
How to Profit: Buyers should have been 50% long the Spyder Gold Trust (GLD) at $170.44 and 50% long at $169.12. Both positions were stopped out at $164.88 for a 2.9% loss.
Buyers should also be 50% long the iShares Gold Trust (NYSEARCA:IAU) at $17.08 and 50% long at $16.86 with a stop at $16.32. Wednesday's low was $16.45. Sell half the position at $16.80 or better to lower your exposure.
Buyers should be 50% long Newmont Mining Corp. (NEM) at $60.12 and 50% long at $59.20. Close the position now or use a stop under Wednesday's low of $59.02.