GLD Follow Up

For newer members, GLD has been a long term topic of our analysis, I'll try to cover the bases and what we may be seeing unfold and where the trades are within the current analysis.

A discussion of the basics of trend classification is essential. OVer the years there have been many different ways Primary, Intermediate and short term (I also consider sub-intermediate trends between short term and intermediate). A Primary trend is the main trend, for the most part a primary trend is considered as lasting at least a year, often more such as in a bull market which we saw the last true bull market (without intervention) in my opinion between the 2002 lows and 2007 highs, so just about 5 years. Most consider an intermediate trend to last between 3 weeks to 3 months (I tend to look at them as being a bit longer). Some people classify a Primary trend as an uptrend that consists of 2 or more intermediate trends and within each intermediate trend, 2 or more short term trends (typically considered as lasting 5-15 days-perhaps what most would consider a swing trade).

Because there are so many different standards applied to trend classification (especially with the popularity of Elliot Wave analysis), when I taught Technical Analysis for our County School Board's Adult Education program, I simplified trend classification using the direction a moving average is currently pointing in. For a primary trend I use a 200 day moving average's current direction, for Intermediate, a 50 day moving average, for sub-intermediate, a 22 day average and for short term a 5-10 day moving average. It is important to know what the trend is as your trades are much higher probability when they are aligned with the trend you are trading.

Now, lets start with the big picture.

 This is the price pattern we are seeing a lot of lately, the descending triangle which carries an inherent bearish bias, it is a consolidation/continuation pattern which means there must be a preceding downtrend before the consolidation formed. We have been seeing a lot of head fake moves on the pattern, typically short, but many have been worthwhile. The last two trades in GLD were a long trade that went against everything Technical Analysis teaches, that was at the white arrow and yesterday's short trade at the red arrow. From a chart/signal perspective, it would have been better to enter the short earlier in the week, but with the risk of the F_O_M_C policy statement and GLD potentially being one of the biggest movers if the policy statement hinted at QE3, I decided to wait for that risk to pass. I always want to control as much of the trade as I can and an F_O_M_C policy statement is a wild card that I would have simply been gambling if I had entered the short earlier.

 Here is the 60 min GLD 3C chart showing the divergences that were the signals for both trades, leading positive at the May 30th low, leading negative in to GLD's huge move up ( multi year record 1 day move) and after as well.

 This is the long term trend in GLD with a 150 day moving average which has historically been the perfect spot to buy gold on a pullback, we were considering buying GLD on the next pullback to the average in late Summer of 2011, but the way in which GLD arrived at the moving average at the orange arrow, caused me concern and we skipped the trade (the move down was too volatile and reminiscent of a top).

 Sure enough, a top formed in the form of a large triangle (these are often tops or bottoms depending on the preceding trend, they are too big to be consolidations). As you can see, for the first time in2+ years, the 150 day average was broken. We had 1 head fake trade on an upside breakout in which Puts were used for a 215% profit in 2-3 days at the red arrow. I have maintained since 2011 that GLD was either forming a Primary trend top/reversal or at minimum, an Intermediate trend reversal.

 If you look at the lower lows/lower highs as well as the timeframe (we are nearly at a year), I was correct in the assumption we had AT LEAST an intermediate trend reversal and very close to a Primary trend reversal. Right now GLD is holding at some support so it is not clear if a lower low will be made, keeping the downtrend in effect and moving it more conclusively to the Primary down trend classification. As you can see by my blue 200 day and yellow 50 day moving averages, both are pointing down.

 Here the daily 3C chart shows the negative divergence at GLD's highs, this combined with the very volatile pullback to the 150 day moving average i why we skipped buying GLD. However since then there have been 2 positive divergences at the support area mentioned above. We may be getting ready to see another change in GLD's trend, one possible reason why was covered in this post yesterday with some information a member sent in. 

 As for the current Put trade (short GLD using options), the 5 min chart went negative this week very clearly and is currently in line with the price trend. "If" the speculative theory proposed yesterday holds any water, we should at some point see accumulation of GLD in to lower prices. After all, if there's a serious policy change about to take place that makes gold more valuable in transactions, smart money will want to start accumulating again in to lower prices and remember the daily chart with the recent change in character from distribution to positive divergences. As Smart money would have already sold GLD (distribution) back in 2011, they would need to accumulate a pretty large new position and that should show up on 3C charts as it appears to be on the daily chart.

For now though, the intraday timeframes are in line with price action, I may consider closing and re-opening the put if it looks like GLD may see a bounce or an extended consolidation, but for now the near term trade seems to be short, however depending on how the charts develop through this move down, we "may" be at the leading edge of a new primary uptrend in which we would likely see it and have a chance to buy in to it before anyone (retail traders) even have a clue.

As of now, yesterday's GLD short (put position) is holding with a 36% gain.