Is Gold's Rally a Bull Trap?

07/25/2013 10:05 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

The recent rumors of a gold shortage caused an apparent short squeeze in gold, which fueled conspiracy discussions amongst some experts, but Moneyshow’s Tom Aspray discusses whether the recent rally is really just a “bull trap.”

The market internals were weak Wednesday, especially notable was the negative A/D ratios in the Nasdaq Composite though it actually closed higher. The McClellan oscillator has confirmed a new short-term downtrend and could drop below the zero line with a lower close Thursday. The stock index futures are showing significant losses in early trading despite Facebook’s (FB) stellar earnings.

Monday’s $39 rally in the gold futures had some gold bulls out of the closet while skeptics warned that rumors of a gold shortage were part of a global conspiracy. Gold lost $14 on Wednesday, which accompanied a $2 drop in crude oil.

Given the high level of bearish sentiment for the precious metals, is now the time to buy or is this just another bull trap?

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Chart Analysis: The weekly chart of the Comex Gold futures has a typical seasonal tendency as demonstrated using the Seasonal Trend feature from Trade Navigator.

  • This analysis shows a top in gold around January 18 while the analysis of seasonal experts like John Person indicates a top in February.

  • The chart shows a typical bottom for gold on July 5 but many experts look for a bottom in late July or even early August.

  • One, of course, has to remember that these are tendencies, and before you act, the technical studies need to agree.

  • Last year gold formed a multiple bottom in the May-June period, and the technical studies were in agreement by early July of 2012.

The monthly chart of the gold futures (updated through 7/25) indicates that we should close the month above the June close of $1274.

  • The 61.8% Fibonacci retracement support from the 2008 low at $1179 was broken in June but not on a weekly or daily closing basis.

  • The weekly OBV (not shown) violated its WMA in October of 2012.

  • The monthly OBV dropped below its WMA at the end of November of 2012, so the multiple OBV analysis was negative with gold’s close at $1720.

  • The uptrend in the OBV, line a, was broken at the end of January.

  • The monthly OBV made new lows in June as did the weekly OBV (not shown).

  • The weekly and daily OBV (not shown) have moved back above their WMAs after confirming the price lows.

  • The insert shows that the rally from the 7/5 lows was exactly equal to 1.618 times the rally from the 6/28 low to the 7/2 high.

NEXT PAGE: Bottoming Still in Process

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The daily chart of the Spyder Gold Trust (GLD) shows that the daily starc+ band was tested on Monday and Tuesday.

  • The resistance from the April and May lows, line b, has been tested.

  • Tuesday’s high at $130.14 was just above the quarterly pivot at $129.89.

  • The more important 38.2% Fibonacci retracement resistance is at $137.43.

  • The 50% resistance level is at $144.43 with the downtrend, line a, at $147.43.

  • The rising 20-day EMA is at $125.24 and a close below $122.70 will indicate the rally is over.

  • The daily OBV has moved above its WMA but shows a pattern of lower lows, line d.

  • The OBV is still well below the downtrend from last September, line c.

  • More importantly, the weekly OBV is still well below its declining WMA

  • GLD is currently up just over 11% from the June lows.

The Market Vectors Gold Miners (GDX) is up over 21% from its June lows as it has reached the resistance from April and May.

  • The chart shows converging resistance in the $29.50-$30 area, lines e and f.

  • The 38.2% retracement resistance is just below $35.

  • GDX reversed to the downside Wednesday after testing its daily starc+ bands. It is still above its declining 50-day SMA.

  • There is next support in the $26 area with the 20-day EMA at $25.43.

  • A daily close below $24.70 would be the first sign that the rally was over.

  • There is additional support at $23.65 with the June low at $22.21.

  • The daily on-balance volume (OBV) shows a well-defined downward trading channel as it made significant new lows on June 26, line h.

  • The OBV is back above its WMA but is still below the downtrend, line g.

  • There was a large up volume spike on June 28, which was a positive sign

What it Means: In my opinion, the daily and weekly technical readings suggest that gold has not completed a bottom yet. At a minimum, I would expect to see at least one more drop to or below the June lows before a bottom is completed. Going back to 2004, GLD has not begun a significant new uptrend when its weekly OBV was below its declining WMA.

Even if my analysis is wrong, the risk is too high in buying GLD at current levels of $127.48 as a stop under the June lows of $114.68 would be a risk of 10%, which is too high. It is a good example why risk analysis so important.

Those who bought near the lows have a different risk profile, but I would suggest taking some profits at current levels. To improve the outlook, GLD would need to close above $138.

How to Profit: No new recommendation

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