Is Now the Time to Buy Gold?

11/27/2013 10:00 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

Since the price of gold has recently declined, many analysts are considering buying. However, MoneyShow’s Tom Aspray takes a technical look at the charts and finds reasons to wait.

Another day of stock market gains, as the Nasdaq 100 and Russell 2000 made new closing highs that have been confirmed by their Advance/Decline lines. The Dow Jones Industrials made a new closing high by 20 cents. The S&P 500 and NYSE Composite failed to make new highs.

The divergences discussed in yesterday's column are still intact, as the A/D numbers were just narrowly positive. It will take a day of sharply positive or negative A/D ratio to signal the next sustainable move for the broader market. With light holiday volume, we may just chop around for the rest of this week.

Gold prices have stabilized this week, with the December gold futures up just over $8 from last Friday's close. The futures are down over 25% for the year and have lost 8% from the late October highs, as the "bull trap" I have been discussing for the past few months slammed shut two weeks ago.

Many traders and investors are now wondering whether prices have declined enough to create a good buying opportunity, but are there signs now of a technical bottom?

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Chart Analysis: The weekly chart of the SPDR Gold Trust (GLD) shows the second drop below the weekly starc- band in late June and the ensuing sharp rally.

  • The rebound failed in August, as the 38.2% Fibonacci resistance level from the 2012 highs was tested.
  • The weekly chart shows a pattern of lower lows, but, so far, prices have held above the June lows.
  • The OBV shows a solid weekly downtrend, line b, since early in the year.
  • The OBV broke support in early April, (see arrow), as prices were about to plunge.
  • It is an encouraging sign that the OBV is still holding above the June lows.
  • The recent swing high on the weekly chart at $131.44 now represents important resistance.

The daily chart of the SPDR Gold Trust (GLD) shows the completion of the flag formation, lines c and d, on November 12.

As I discussed on November 5:

  • A break of the key support at $121.85, (point 3), will complete the formation.
  • There are several ways to calculate downside targets, based on Fibonacci analysis, as well as on the chart formation.
  • If the decline from point 4 is equal to the decline from point 2 to point 3, then the 100% Fibonacci projection target is at $115.74.
  • Using the rally from point 1 to point 2, the 127.2% Fibonacci retracement target is at $108.65.
  • The daily OBV broke support at line f, a few days before prices violated their key support.
  • The target at $115.74 still looks attainable before year end, as it is just 3.4% below current levels.
  • The chart shows that the starc- band was tested last week, (see arrow), so, we could see a further bounce before the decline resumes.
  • The declining 20-day EMA at $123.60 now represents strong resistance.

NEXT PAGE: One More Gold ETF to Watch

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The Market Vectors Gold Miners (GDX) is down over 45% YTD, and has lost over 17% in just the past month.

  • The daily chart shows that the uptrend, line a, was decisively broken in September when GDX was trading at $25.17.
  • GDX quickly dropped over 11% to a low of $22.78 on October 16.
  • The following oversold bounce stalled below the former uptrend, (line a), and the 50% Fibonacci retracement resistance from the August high.
  • This week, GDX made new correction lows at $21.52 and is close to its starc- band.
  • The weekly starc- band is currently at $19.40, which is very close to December's projected pivot low.
  • The daily OBV broke its support, line d, just a few days after GDX tested its declining 20-day EMA, (see arrow).
  • The OBV has confirmed the recent lows, and the weekly OBV is also negative, so the OBV multiple time frame analysis still points lower.
  • There is initial resistance now at $22.50-$23, with the 20-day EMA at $23.56.

What it Means: Despite the various fundamental arguments for buying gold, the daily and weekly technical outlook is negative for both the metal, as well as, the miners. Clearly we will see further sharp rallies, but until we see some more positive signs from the OBV, it is best to be on the sidelines or short.

How to Profit: No new recommendation.

Portfolio Update: The PowerShares DB Gold Short ETN (DGZ) was recommended on November 5, with the first buy zone at $14.36. Unfortunately, the next day's low was $14.42, so in a November 8 Tweet, I changed the buy to $14.71 and $14.65. DGZ hit a low of $14.70 on the 14th. Use a stop now at $14.37.

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