The charts flashed a clear warning sign before gold’s recent decline, and while the mid- to long-term trend remains positive, it’s time to hedge existing long positions.
Longtime readers know that Starc bands are among my favorite technical tools. Still, last Thursday’s column on gold, where I pointed out that risk on the long side was uncomfortably high, was treated with a fair amount of skepticism, as some were looking for the $2000 or $2500 level to be reached before a correction began.
In that article, I pointed out that as gold was accelerating to the upside, the bearish analysts had disappeared. More importantly, the SPDR Gold Trust (GLD) was trading above both the monthly and weekly Starc+ bands. Historically, this was a very rare occurrence.
As I noted at the time, “When a market reaches a historically high-risk buying area using both the weekly and the monthly analysis, the odds of some consolidation or a more significant pullback are very high. From a money management point of view, this can allow even long-term investors to protect profits by hedging their positions.”
Given the parabolic nature of the recent rally, the correction could last for some time, but it is important to remember that the intermediate and long-term trends are still positive for gold. For those who are not accustomed to gold’s volatility, you may want to take a look at past gold corrections, as detailed in “Are You Ready for Gold’s Volatility?”
Gold futures are down another $35 in early trading on Thursday, so GLD could lose another 2.2% on the opening. The key Fibonacci retracement and chart support levels can help identify the key levels investors and traders should be watching.
Chart Analysis: Whether investing or trading one of the gold ETFs or buying physical gold, it is important to keep an eye on the gold futures. The daily chart of the October Comex gold contract had been exceeding the daily Starc+ band for the three days prior to yesterday’s drop.
The weekly chart of the SPDR Gold Trust (GLD) shows it has been trading above the weekly Starc+ bands for the past three weeks, a clear “red flag” warning sign. The weekly Starc- band is currently at $156.
NEXT: See Key Downside Targets for GLD