Divergences on the Gold Charts

07/02/2010 12:01 am EST

Focus: ETFS

Corey Rosenbloom

Founder and President, Afraid to Trade

There’s something I’ve been observing on gold’s daily chart that is worth sharing. Namely, it’s the strange technical (chart) position of the “top-heavy” feel of the price, a terminal short-term Elliott Wave count, and a lengthy negative divergence at the recent highs.  It’s not as complicated as it sounds.

Let’s see them all:

Click to Enlarge

By “top heavy,” I mean that the most recent move felt a little forced, or sort of like bulls are pushing price higher, but doing so with increasing effort to keep the price up; almost like the weight of gravity is defying them.

That’s more of a feel than anything scientific, but there are objective ways to interpret this.

First, I’ve labeled a short-term “Elliott Wave fractal” five-wave count on the move from April to the present. That’s interesting.

On that short-term fifth wave, we see a crystal clear negative momentum (3/10 Oscillator) divergence that undercuts (fails to confirm) the new push to gold’s recent highs.

The $1,260-per-ounce level is serving as resistance while the rising 20-day moving average is serving as support. One of those has to break soon—if anything because the average is rising to converge soon with the $1,260 level.

As of this writing, gold is down $20 in the morning session, which isn’t shown in the chart above (StockCharts.com updates end of day for gold).

To see that, let’s turn to the popular SPDR Gold Trust ETF (GLD):

Click to Enlarge

The overhead resistance in GLD is $124 per share, and the rising 20-day EMA rests at $120.

But wait! Sellers broke price down through the recent support of the average, which sets up a sell swing to test the rising 50-day EMA at $118.50.

In the event that sellers push gold under the 50-day average—which rests at $1,210 in gold itself—then we could see a further selloff materialize.

In addition to a negative momentum divergence, we also have a negative volume divergence at the highs, both of which undercut the high and suggest a deeper retracement is brewing.

Strange that I along with many people would have expected gold to bust to new highs as the stock market collapses through support, but we have to listen to the message from the charts. It’s certainly something to watch.

If we really do go into a stock market crash from here—or a continuation of the crash in progress—we could be looking at another October 2008 scenario where everything falls as investors panic. Oil was already down $3.00 per barrel yesterday morning.

I suspect we’ll know soon enough.

By Corey Rosenbloom, trader and blogger, AfraidToTrade.com

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