GLD: A Great Set-Up!

thetechnicaltake's picture
Submitted by thetechnicaltake on 12/30/2011 11:41 -0500

Bond
Exchange Traded Fund
Precious Metals
Price Action



I am sure you have heard all of the pronouncements that the bull market in gold is over. All sorts of reasons have been given from strength in the Dollar to the "you better run for the hills" price is now under the 200 day moving average for the first time in 10 months. I am not going to "poo poo" the price action, because it has been ugly, but all of the data I can muster shows that the fundamental and technical picture remains bright for gold.

First, this downdraft still remains within in the realm of pullbacks for a gold bull market. Bull market dogma would suggest that a bull market will do its best to throw you off the bull, and I believe that is what we have in this case. Second, the fundamental picture remains bright for precious metals as bond yields appear to be going lower; there is still talk that economy (or stock market) needs a life line. Third, Dollar strength is the time to buy gold. Fourth, investors' sentiment towards gold has not changed. In other words, if gold was entering a bear phase, I contend that investors actions would suggest such a dynamic. Lastly, the longer term (monthly) charts continue to suggest that the bull market in gold is very much intact, and if anything, the recent tumult in prices is a buying opportunity as price is at the bottom of a rising price channel.

Despite all the good, I am not going to minimize the technical damage that has been done. This can be seen in the weekly chart of the SPDR Gold Trust ETF (symbol: GLD). See figure 1. The pink and red dots are key pivot points, which represent the best areas of buying (support) and selling (resistance). The wide range price bar (see red arrow on chart) that closed below the support level at 157.18 is the first sign of technical damage. Support levels should hold, but this one did not, and within the context of positive fundamentals, I would consider this a warning sign.

Figure 1. GLD/ weekly

[fig 2 12.30.11]



The next level of support (150.10) appears to be holding, and based upon the following daily chart of GLD, the price dynamics are turning bullish. See figure 2. Once again, the gold and black dots represent key pivot levels. This past week prices broke below the key pivot at 151.96, and with today's price action, price is likely to close back above this key pivot point level. Break below support leads to selling. Buyers step in taking prices higher leaving weak hands on the sidelines with remorse for having sold at the lows. Resistance (old support) coincides with the weekly levels at approximately 157.

Figure 2. GLD/ daily

[fig 3 12.30.11]

In sum, within the context of the fundamentals, the current technical set up in GLD is compelling. A weekly close above 157 would confirm the idiocy of the crowd, and a weekly close below 150-ish would be reason to step back again from gold.



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