GLD / Gold Update

GLD / Gold have been tracking pretty close to GDX (Gold Miners)...

60 min chart of GLD vs GDX...

So for now, just for the sake of time, I'm going to cover Gold/GLD only, but GDX has been seeing many of the same signals so I'd say most everything we see in gold is about what we'll see in GDX and I'll update GDX when I have a little time (hopefully today).

You may recall I opened a split position (1 position for risk management's sake, but half GDX calls and half GLD calls, both December with $25 and $126 strikes respectively). Friday I added a bit to the GLD portion of that position.  I generally chose leveraged assets when the duration of the trade seems to likely be shorter and I prefer to not use leverage if possible if I think the duration of the trade has enough profit potential such as a trending position.

For a quick overview...

 As a brief review of our longer term analysis of gold, gold had been trending up solidly from 2009 as a result of QE, this is why I noted Gold and other QE sensitive assets trading in a very QE-Off manner vs equities on Friday after the Job report.

From 2009 (1) Gold/GLD was pulling back to the 150 day moving average like clockwork and that was an east entry that limited risk and was reliable. However as GLD made an uncharacteristically stronger run in to the 2011 highs (2), the return to the 150-day moving average no longer looked like a safe trade, but like Gold was topping and we called it as such in 2011 expecting to see either an intermediate or primary downtrend to follow (3). Very often right as we move in to a top, the last stage of the uptrend becomes uncharacteristically volatile to the upside, these changes in character may look bullish, but are often red flags warning of the end of a trend.

As we have moved toward (4) we have noticed some changes in underlying trade with a more bullish to. The main question I have had since this started was whether this would end up being a strong counter trend rally or a stronger/longer intermediate or maybe even primary uptrend. To me the difference and probability in judging the two is essentially all in the size of the base and what that base will support.

 Here the weekly gold futures shows the 2011 top/negative 3C divergence and a recent relative positive 3C divergence.

Something is going on in gold, it's still a matter of what that something will look like, I believe we will get at least a sub-intermediate to intermediate uptrend with what's in place now, if we get a deeper pullback from current levels, then I think there's a base large enough to hold a primary uptrend.

This is the closer 1-day gold futures chart and it shows the recent positive divegrence in gold futures at both the low and on the recent pullback which is what we'd want to see, a pullback being accumulated.

The 4 hour gold futures shows a negative divegrence at 8/28 causing a pullback in gold futures and that pullback showing a positive divegrence as prices move down, this accumulation of lower prices and supply is what we want to see to build a stronger base in gold resulting in a stronger eventual longer term move to the upside.

The 2 hour chart of GLD shows GLD/3C moving down together (green arrow) in price/3C trend confirmation and then a negative divegrence at 8/28 just like gold futures and a positive divegrence in to the pullback just like gold futures.

More recently gold futures on a 1 hour chart show a negative divegrence at 10/28 (I don't see this as negative as in "selling gold to get out", but rather bringing price down to a cheaper level to accumulate on the cheap which also creates supply through longs being stopped out and shorts selling short, both create the supply needed to establish a large position and on the cheap as well.

The 30 min chart of GLD shows the same thing, the negative divegrence isn't present here, but the positive in to the pullback is and we also have a positive at lower levels previously around the $122-$124 level. This was the first area I thought GLD was likely to pullback to, whether as the final pullback and base or as an area where a counter trend bounce would create more opportunities before heading even lower to make a larger base that would eventually support a larger trend reversal to the upside.

 The daily chart of GLD shows a gap fill and a bullish "Hammer" candlestick Friday after a gap down, volume was decent, but not the kind of capitulation volume I'd like to see.

This short term intraday chart is one of the reason I liked an add to or even a new long position in GLD for at least a short term swing-type move. The Payrolls data on Friday that sent gold lower in a QE TAPER On manner, may have created some short term distortions in the trend so I'm mindful of that, but I do like the sudden and very clear positive divergence as GLD gaps down in to a hammer.

 The 30 min gold futures chart shows essentially the exact same thing.

So my two levels I have been looking for are a pullback to area 1 which we are essentially at now which I think can support a sub-intermediuate to intermediate uptrend, but this would likely be considered a bear market counter trend bounce. Don't get me wrong, bear market rallies are some of the strongest rallies you'll ever see, however, if GLD/gold were to pullback to #2 (yellow), then the probabilities of an intermediate to primary bull market in gold go way up as long as there is continued accumulation in to the pullback which creates a wider base capable of sustaining a larger move like a primary trend.

I think either way gold / GLD sees some bounce in this area, whether a swing move and then continuing to create a larger footprint/base at this level or a swing move up and pulling back to a deeper level, but ultimately a stronger base, has been the question.

I think we will know and the base will be very clear once we are there. I'm more looking for a swing type bounce in this area, then either the basing process fills out in this area around $122 or it pulls back deeper and the rounding reversal process fills out around $114-$115.

Either way I think there's a longer, stronger long position, but a little patience is needed to judge whether it looks more like a primary trend reversal or a strong counter trend bounce.

*Even after the initial 1929 market crash, the first counter trend rally occurred only 2 to 3 months after that first major break and that rally was good for almost a 50% gain and lasted nearly 6 months so like I said, they are powerful, THEY NEED TO BE TO CONVINCE TRADERS TO ENTER THE WATER AGAIN.

For now I'm keeping the GLD and GDX positions in place and I'll update the GDX position as to whether it looks like an add-to or new position now or whether I'd just hold what is open or stand aside.