GLD Update

It's been a little while and I won't be dishonest, analyzing gold and silver are my two least favorite assets to analyze, there are so many wild cards at play between rates, correlations, broken correlations, flight to safety trades that turn in to risk on trades as well as the often arbitrary COMEX margin hikes and the surprising recent lowering of margin maintenance. However, I have several gut feelings about the asset 1) It may very well be a bubble, the psychological environment is very "bubble-like" and that is always accompanied by a "This time it's different" and there's a compelling case to be made for gold in a devaluation of currencies the world over, however there's an equally strong case that goes like this, "Central banks throughout the centuries have done some of the most criminal, dishonest and manipulative things they could possibly due to control the money, they fought hard for fiat currencies and without fiat currencies, they lose their power". If you think politician's are power hungry, look at the history of the Central bank cartels and how they came to be and always remember that Federal in a corporation's name doesn't make it any more "Federal" then Federal Express, these are quasi-governmental corporations that are for profit and have shareholders they report to. Gold represents a clear and present danger to their power.

As for GLD analysis, I dug deep on this one to take a look at all angles.

 Here is one way to look at GLD's trend, bulls will point out that the pattern and volume is that of a bull flag, I would suggest that a bull flag or a bear flag is a consolidation pattern that rarely exceeds two weeks in length. This could also be viewed as a downtrend and in a downtrend, volume IS NOT important. You've probably heard the saying, "Stocks need volume to rise, but they can fall of their own weight", furthermore, in studying bear markets and confirming what I have learned, low and declining volume is a hallmark of a bear market. So there are two views that are opposing, lets dig deeper.

This is a second way of looking at GLD, a large triangle top (large triangle's are most often tops or bottoms, not consolidation patterns). Then GLD broke down from that pattern and broke the 3 year old support of the 150 day m.a. I have pointed out how the break down of tops has changed over the last 10-years and is totally different then what Technical Analysis has preached for a century. According to Technical Analysis dogma, a break of a top is to be shorted and in 2000 that worked well, but things have changed with people using the internet and cheap online brokers and turning to technical analysis. Wall Street knows what technical traders will do when a top breaks, they will short it, that is why we almost ALWAYS see a volatility shakeout after a major break causing the shorts to be run out of the trade. This does not nullify the top, it just takes advantage of the predictability of technical traders and makes Wall Street easy money because of their predictability. That appears to be what has happened here in GLD if we consider the "Triangle Top " scenario. I even said way back when price was under the 150 day, to expect a move up on a shakeout and probably to the area of the triangle's apex, which has happened.

 Last year I pointed out to members that GLD touching it's 150 day moving average, historically over the last 3 years or so, has been an excellent place to buy GLD at very low risk and very high probability. However, as the trend accelerated, there have been fewer and fewer opportunities to buy at that average and when we hit it late last year, I didn't feel good about buying there and suggested that we hold off, the decline to the moving average was sharp and unlike anything we had seen previously, remember, changes in character are warnings.

I added a Rate of Change to GLD, it got a little extreme in late 2009 and when we see extremes in volatility, they often mark tops, in 2010/2011 the ROC flattened out and then burst in to a very volatile move, this is what I was worried about on the buying opportunity and why I said, "We should wait this out'".

 Here's a close view of the Apex of the triangle and rally off the lows that broke support right to the apex. A trading range has been established, this is a set up for T.A. traders, a breakout from the range is supposed to be bought, but look at the first break to a new high around early Feb. The breakout volume was low, the failure to hold it was on increased volume, longs were stopped out. Now we have another possible breakout of the range and again volume is low. To entice longs to buy this breakout, it will have to make a new high and surpass the former breakout to remove any lingering doubts.

 The first negative divergence around November was the break from the triangle and made the local new low which was the first serious lower low in 3 years. You can see the accumulation of that low for what I suspect was the volatility shakeout, while Wall Street may view this as a bubble and be moving out of the position, they certainly will play the long side especially when they set it up, the recent negative divergence suggests that this cycle is at stage 3 distribution.

 Long term, 3C 2 day shows the first serious negative divergence in 3 years and around the top area. 3C was in line with price as it declined to make the first lower low of the 3 year old trend, the probable "volatility shakeout" is not in line with 3C, but leading negative, which is exactly what I would expect to see, shares distributed in to strength and Wall Street could have easily picked up the shares on the cheap as the accumulation for this move seen on the chart above, was during the month of December. Remember the Paulson Flagship fund "Advantage Plus" that lost over 50% last year, of their top 5 holdings, only GLD was profitable. Being the end of the year and having lost over 50%, they were hit hard with redemptions and the only way to meet the redemptions (raise cash) was to sell their only large profitable position, GLD, so other Wall Street firms could have easily picked up a large sell transaction and accumulated from Paulson's selling.

 3C is not the only indicator showing long term distribution, Money Stream which was invented by the man who was the creator of the first money flow indicator, "Tick Volume" and which all money flow indicators that are popular today are based on, shows a negative divergence even worse then 3C's and these two indicators have almost nothing in common in their source code, if they did it would explain why they gave similar signals, but they don't.

 A 5-day chart of Money Stream shows how bad the divergence is, this is leading negative.

 My DeMark inspired indicator has given several buy/sell signals, but the worst was clearly at the top for GLD.

 Recent analysis has shown my Trend Channel looking like it was about to roll over and I have said, I would wait for a break of the bottom of the channel before entering a GLD short, however if this breakout today shows strong distribution and looks like a head fake move, then we may very well have a better risk/reward set up, but as I mentioned, to remove doubts about this being a false breakout, I would think a higher high would need to be made to get longs in the trade.

 I've done my research with regard to which currencies have the best correlation to GLD and by far, the Australian dollar or AUD/USD by far has the best correlation and the best leading indications. At point "A" the AUD (FXA) made lower lows while GLD made higher highs, it diverged negatively and that was gold's top. The same happened at point "B" and at point "C", the AUD made higher lows and was in an uptrend while GLD was still bottoming, so AUD led GLD and gave advance notice as a leading indicator.

 Here we see the last positive divergence in AUD leading GLD higher.

 On a shorter 15 min chart, there's a negative divergence which enforces the idea that this may be a false breakout or head fake move.

 The 5 min chart makes it clear as well.

 Interestingly, intraday, if we use the downtrend channel I showed above, GLD popped in volume on the break above and then popped on volume as it tested support and perhaps, failed (depending on how accurately I drew the trendline.)

 The 1 min chart suggests this may be what happened.

 So does the 5 min chart

And the 15 min chart, even though it was in line today, it was also in a leading negative position.

So if you are interested in a GLD trade, we'll keep an eye on possible confirmation or a negative divergence. A break back below the $170.50 area may be an area to start a position, I would still wait to add the bulk of a position upon the break of the trend channel around $166.50.