Lower prices in gold and the SPDR Gold Trust (GLD) are needed to shake out remaining weak longs and dampen excess bullish sentiment before a sustainable price low can be completed.
It has been a rocky past seven months in the gold market. Since the early-September highs, there have been four wide swings, and gold prices are currently in a downtrend from the late-February highs.
Gold futures and the SPDR Gold Trust (NYSEARCA:GLD) traded above their monthly Starc bands in both August and September of last year (see "Red Flags Preceded Gold's Drop"). This was the first time this had occurred since early 2008, and it indicated that gold was in a high-risk buying area when it was trading above $1800.
In 2008, gold declined over 34% in seven months that followed, as the sentiment saw a dramatic shift. A similar change in sentiment occurred after the December 2009 highs, and by the following March, many gold bulls had turned bearish.
Though there are signs that the sentiment has turned less bullish now, there are still quite a few analysts recommending gold or gold mining ETFs. This suggests to me that further price weakness is needed to create the less-bullish environment necessary for gold to complete a sustainable bottom.
Chart Analysis: The above daily chart for gold futures goes back to early 2011 and shows the low in late-January 2011 at $1307.
- On the bottom of the chart is the Genesis Sentiment Index, which was at zero for almost two weeks during this period (line 1) as prices were bottoming. Since the COT data is only released weekly, the Index will not change in between reports
- The Sentiment Index rose to over 75 in late-April 2011, and soon after, gold dropped over 7% in just four days
- The Sentiment Index hit 100 on July 25, 2011, and by the time prices peaked on August 25 at $1915 (line 2), the Sentiment Index was already declining
- Gold made higher highs just nine days later, but the Index dropped to 48
- The Index had a low of 3 in late-December 2011 (line 3) when gold was making its low of $1523
- Recently, the Index peaked at 60, and gold is now down 7.8% from its highs
- The chart shows trend line support for the gold futures, line a, is now in the $1570 area with the major 38.2% Fibonacci retracement support at $1447
The weekly chart of the SPDR Gold Trust (GLD) (left panel) shows that it came quite close to the weekly uptrend, line a, last week.
- The weekly Starc- band is at $153.50 with additional chart support in the $149.70 area, line b
- Weekly on-balance volume (OBV) is back below its weighted moving average (WMA) and looks ready to test support at line d
- The lower highs in the OBV (line c) are a sign of weakness. The OBV could test stronger support at line e
- First weekly resistance for GLD is at $166.50 with more important resistance at $174
The daily chart for GLD (right panel) still looks corrective with next daily support at $155-$157.50.
- Further support is at $152 with the December low at $148.27
- The lower support, line g, is in the $143 area
- Daily OBV is in a short-term downtrend (lower highs and lower lows) and is below its declining weighted moving average. It is still above the December lows
- Daily OBV has key resistance at line h
- There is first daily resistance for GLD at $164 to $166
What It Means: The frustration over the weakness in gold prices is likely to continue, and a further decline is needed to complete a significant bottom. A break below the December lows could be enough to shake out the remaining bulls.
If GLD instead has another rally back to the $170 area, it is likely to fail there. It will be important to watch the volume action, as the monthly OBV is still positive for gold.
How to Profit: For the SPDR Gold Trust (GLD), go 50% long at $148.55 and 50% long at $146.80 with a stop at $139.20 (risk of approx. 5.7%).
Alternatively, for the iShares Gold Trust (IAU), go 50% long at $15.06 and 50% long at $14.66 with a stop at $13.68 (risk of approx. 7.9%).
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