The Golden Opportunity Is Still Ahead

02/13/2012 11:40 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

It seems a buying opportunity may be ahead for gold, but wait for a larger pullback in gold futures and the primary gold ETFs before buying, as risk remains high at current levels.

The gold futures and the SPDR Gold Trust (GLD) closed weak on Friday in reaction to the uncertainty over Greece’s debt deal. Prices have rebounded early Monday, however, which likely has many investors and traders wondering it they missed their buying opportunity.

In January, one potential scenario I outlined was “for a rally to the $168-$170 area, which would be followed by a pullback to the $158-$160 area or lower.” The high in GLD on February 2 was $171.23, and Friday’s close at $167.14 was 2.3% below the highs. Was that enough of a pullback?

The weekly and monthly analysis does suggest that the completion of the flag formation was bullish and projects significantly higher targets for gold. As discussed below, the short-term technical action suggests a further decline is likely, which is consistent with the recent peak in bullish sentiment reported by Mark Hulbert in early February. The sentiment is likely less bullish now, but I am sure it is still quite high.

Let’s look at the intermediate as well as the short-term outlook for gold futures and GLD to determine a favorable risk/reward entry level.

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Chart Analysis: The weekly chart of the Comex gold continuous contract shows the completion of the flag formation (lines a and b). First resistance is now at $1766 with further resistance at the November highs just above $1800.

  • The Fibonacci price targets from the flag formation are in the $2030 area
  • The volume for the last week of 2011 was low (line 1) and marked the low in the gold futures
  • The on-balance volume (OBV) moved above its downtrend, line d, and its weighted moving average (WMA) two weeks later when gold closed at $1630
  • There is initial support now at $1690-$1700 with the 38.2% Fibonacci retracement support from the early-February highs at $1675
  • There is major support in the $1600-$1625 area

The daily chart of the SPDR Gold Trust (GLD) also shows a completion of the flag formation (lines e and f). There is next support at $165 with the Starc- band at $164.

  • The 38.2% Fibonacci retracement support is at $162.40 with the 50% support at $159.75. This coincides nicely with the upper boundary of the flag formation (line e) and the key 61.8% retracement support at $157
  • Volume was strong on the breakout as the daily OBV did break its downtrend, line h, on January 23
  • The OBV dropped back below its weighted moving average on Friday. It could retest the breakout level on a further correction
  • Initial resistance is now at $168-$170 with further resistance at $174-$175.46
  • The 127.2% Fibonacci upside target from the flag formation is in the $196 area

NEXT: Attractive Buy Levels for GLD Defined

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The hourly chart of the SPDR Gold Trust (GLD) clearly shows the corrective pattern, lines a and b, since the February 2 highs. The 38.2% Fibonacci fan line is now being tested with the 50% fan line at $163.50.

  • The 38.2% Fibonacci retracement support noted above is at $162.40 with the 50% support at $159.75
  • Though I rely more heavily on the actual retracement levels, the Fibonacci fan and arc lines can sometimes give an interesting time perspective
  • The first Fibonacci arc line will be hit by the middle of this week while the 61.8% fan line (line c) should be reached by early next week
  • The hourly OBV shows a short-term downtrend, line d, and did not form any divergences at the recent highs
  • Should GLD make new highs this week, the hourly OBV could form a negative divergence

What It Means: Though a move back to or above the early-February highs is possible over the near term, buying gold at current levels has too high a risk, in my opinion.

For the SPDR Gold Trust (GLD), you would need to use a stop at least under the January 18 lows of $159.68, but a better stop would be under the year’s opening price at $154.75.

The longer-term Fibonacci price targets do make GLD an attractive buy, albeit at lower levels.

How to Profit: For the SPDR Gold Trust (GLD), go 50% long at $162.88 and 50% long at $159.66 with a stop at $154.44 (risk of approx. 4.2%).

For the iShares Gold Trust (IAU), go 50% long at $16.28 and 50% long at $15.82 with a stop at $14.68 (risk of approx. 8.5%). On a move above $17.50, raise the stop to $15.44.

I will be giving a free workshop at the New York Traders Expo on RS analysis. Those interested in attending can sign up here.

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