Gold and Silver Will Correct Further

01/21/2011 10:29 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

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Chart Analysis: The sharp reversal on January 4, when combined with the weak volume pattern, suggested that the metals were ready to decline further, and I put out a special daily chart titled “Has Gold Topped Out?” before the market closed that day.

Spyder Gold Trust (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) has failed to make new highs since November and violated support early this month

  • OBV is now below its declining weighted moving average (WMA)

  • Breakaway gap on Thursday (Jan. 20) 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 (SLV) closed below trend line support a week ago, completing the top formation which has downside targets in the $25.30-$25.50 area and the 38.2% support level.

  • The daily 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 is now in the $27.30-$28.00 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 Jan. 4. 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, I 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-$24.80, and long SLV positions could be hedged by selling the April 25 calls at $3.55 or better.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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