Two Possible Scenarios for Buying GLD

01/20/2012 11:32 am EST


Thomas Aspray

, Professional Trader & Analyst

Technical action in popular gold ETF GLD and rampant bearish sentiment suggests that a bottom and buying opportunity could be set up at one of two important levels in the coming weeks.

Gold futures and the SPDR Gold Trust (GLD) have edged higher over the past three weeks but have failed to keep pace with the rally in the stock market. As I noted in November, investor interest in gold seemed to be very low, and by December, bullish sentiment for gold dropped to extremely low levels.

Though the sentiment is likely less negative now, headlines like “Gold Sheds Can’t Lose Status” over the past month still suggest to me that gold is still close to completing an intermediate-term low.

On a seasonal basis, gold typically tops in February, but remember, this is just a tendency and gold did not follow the normal seasonal pattern in late 2011. I do think we will get a significant buying opportunity in GLD over the next two to three weeks, however, and I see two possible scenarios.

Click to Enlarge

Chart Analysis: The weekly chart of the Spyder Gold Trust (GLD) shows a flag formation from the early-September highs, lines a and b. This is clearly typical of a continuation pattern, or a pause in the major uptrend.

  • If GLD closes Friday near the weekly open at $161.17, it will form a doji candle, which is a sign of indecision

  • The long-term uptrend, line c, was broken in late December, but GLD did not close below it

  • This uptrend is now at $154 with the lower boundary of the flag (line b) at $146 and the major 38.2% support just above $140

  • Weekly on-balance volume (OBV) has just moved above its declining weighted moving average (WMA) and has initial support at line d. Volume has declined over the past three weeks, unlike what happened in early 2011 (circle f) when volume rose alongside prices

  • The 127.2% Fibonacci upside target from the flag formation is in the $196 area

The flag formation is even clearer on the daily chart (right panel), lines g and h. GLD is just barely above its 20-period exponential moving average (EMA) at $158.90.

  • The bullish scenario is for a rally to the $168-$170 area (point 1), which would be followed by a pullback to the $158-$160 area or lower. That should present a good buying opportunity

  • The other, more likely scenario, in my opinion, is another decline over the next few weeks that could take GLD to the $152-$154 area (point 2) or even below the prior lows at $148.27

  • A drop below $148 is likely to cause a sharp increase in bearish sentiment as many long positions would be stopped out. This would be consistent with a significant low

  • The daily OBV is just barely above its downtrend, line i, and while it is above its weighted moving average, it did not form any positive divergences at the lows

NEXT: Latest Outlook for Gold Miners, Silver


Click to Enlarge

Many analysts have been more positive on the gold mining stocks but the weekly chart of the Market Vectors Gold Miners ETF (GDX) looks ready to complete a downside reversal this week.

  • There is next weekly support in the $48-$49.50 area (line a) with further support at $47, line b

  • The relative performance, or RS analysis, indicates that the miners are still acting weaker than the S&P 500, as the uptrend, line c, was broken in early December

  • The OBV has formed lower highs and is below its weighted moving average. Key OBV support stands at line d

  • There is initial resistance in the $54.50-$55.50 area, which needs to be overcome to stabilize the chart

There seems to be more analysts who are bullish on silver, yet the weekly chart of the iShares Silver Trust (SLV) shows no signs yet of a bottom.

  • The declining 20-week EMA is at $31.40, and a close above this level would be a positive sign

  • There is even stronger resistance in the $34-$35 area

  • The weekly OBV did make new lows with prices and is still below its declining weighted moving average

  • There is support in the $25.45-$27.50 area with the major 61.8% support just below $24

  • The long-term uptrend, line e, is now at $23

What It Means: The weekly technical pattern coupled with the fact that it has now been four months since gold made its highs is very typical of a correction in the gold market. The lower weekly Starc band (Starc-) for GLD is now at $143.

The Starc bands did a good job of warning of gold’s high risk in early August (see “Red Flags Preceded Gold’s Drop”) as GLD traded above the weekly Starc+ band for several weeks.

How to Profit: My earlier recommendation to buy the SPDR Gold Trust (GLD) at $148.20 was missed by just seven cents. Look for a new recommendation for GLD in the next week or so.

Portfolio Update

On November 18, I recommended that traders buy the ProShares UltraShort Gold (GLL) at $16.18 or better. That order was filled on November 30. Half the position was sold at $17.48 on December 12) and the remainder was stopped out at $16.09.

For remaining long positions in Under Armour Inc. (UA) at an average price of $72.74, raise the stop to $71.66.

For remaining long positions in Ralph Lauren (RL) at an average price of $137.94, raise the stop to $139.56.

Previous buyers are also 50% long Sotheby’s (BID) at $27.86 (from Dec. 14) and 50% long at $27.24 (from Dec. 19). Raise the stop to $29.44 and sell half the position at $35.40 or better.

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