GLD Charts

These are the charts from the earlier GLD Put position post, Trade Idea (Options) GLD PUT

This is a pretty broad overview since we haven't really looked at gold in a bit broadly.

 This weekly chart has a lot of stuff on it, but from left to right: "A" is a nice trendline with expanding volume on the rise. Gold is often bought before inflation on inflation expectations. With the F_E_D's QE and the devaluation of money by printing more of it, inflation expectations were high and for a while input costs of commodities soared before they were brought under control around Operation Twist. This was also one of the first signs we had that there may be big trouble brewing in China's manufacturing sector, which it turned out, we were right on. 

At "B" the trend accelerated as gold could do no wrong and lord help the person who had anything negative to say about it. I had been noting distribution in to 2011 and had recently established a relationship with a fund manager who is also a pretty prolific blogger. When I mentioned that gold was under distribution and moving toward a large top, I don't think I have ever been so ostracized by a professional that should know not to fall in love with an asset, but gold was just that popular at the time. Even my friends who knew nothing about investing where buying up gold coins, one of them had bought several fakes as you could see the seam on the side of the coin where two halves (front and back) had been joined. Note volume at "B", it is no longer rising as it should in a healthy trend.

At "C" we see the increased "seemingly" bullish upside Rate of Change (ROC), as I had, "seemingly", this is almost always a warning that you are approaching a major top..."Changes in character lead to changes in trend.

We had been following gold and its relationship with the 150-day moving average and were looking to re-establish a pullback position when everything changed in 2011 and a large triangle top (remember this is a 5-day chart) formed. These large triangles are either tops or bottoms, depending on the preceding trend, in this case a top; they are way too large to be considered consolidation/continuation patterns like their smaller 1-2 week cousins.

At "D1" we saw a break below the triangle's apex drawing in sellers and short sellers, creating a lot of supply at cheap prices that was accumulated for a large Crazy Ivan which took place at "D2)  with a break above the triangle's apex, the area short sellers would have placed their stops, giving GLD upside momentum on a short squeeze and new longs chasing momentum, often seen as a precursor to a decline which we predicted in 2011 would be at least an Intermediate (Dow Theory) decline, it turns out it was that and then some with the second (real) momentum break at "E"  and then large volume as stops were hit en masse at "E2" which was straight line triangle support, thus stops, new shorts, etc. al lined up to create major supply.

At "F"  there's something some of you may recognize as a bearish descending triangle, a consolidation/continuation price pattern which after consolidating sideways, continues the preceding trend leading in to it which was down. However, once again this price pattern is way too large to be a consolidation pattern which are typically a few weeks to a few months at maximum, however most traders don't make the distinction and are likely looking at this as a bearish price pattern.

 This is a 1-day chart of GLD, you can see for years the 150-day moving average was a reliable pullback / buy area, until it wasn't.  The near parabolic upside ROC in price should have been the first warning to stay away from GLD's next pullback to the 150 as a long entry as things had changed.

 This is the current daily chart view, again this is way too large to be a consolidation/continuation pattern,  but Wall Street won't mind if you view it in this manner. I think the allure of technical analysis is laziness, not that I believe in fundamental analysis either, you can't come up with reliable data when all the input data is corrupt and even if it weren't, do you think you really have an edge over a multi-million dollar fundamentals department at a major like Goldman Sachs? If you don't know what your edge is, you don't have one or as Warren Buffet said (paraphrasing), "If within the first 5 minutes of a poker game you don't know who the dupe is that will be supplying the game's winnings, then it's you".

 My gut instinct tells me that this price pattern, whether intentional or random, will be used against traders so we have to determine how. I believe that GLD has been making a large base, GDX as well (Gold miners). One of the easiest ways to create upside breakout momentum above the large triangle is to use momentum which can be created cheaply with a head fake move rather than actually spending hundreds of millions in driving up the ask. One of the easiest ways to create upside momentum (And this is covered in "Understanding the Head Fake Move" part 1 and 2 which are always linked at the top right side of the members' site)is to run a head fake move BELOW obvious and major support, triggering numerous stops as well as drawing in short sellers; this creates enormous supply that can be bought on the cheap without attracting any attention and then with the skillful working of the bid/ask, spreading a few rumors, using cheap options to create a false bullish perception, all it takes from that point is a break back ABOVE former support/now resistance as all the new shorts will have their stops sitting right above the trendline, THUS I SUSPECT A DOWNSIDE MOVE THAT IS USED TO CREATE SLING SHOT MOMENTUM FIRST THROUGH A SHORT SQUEEZE, THEN FOLLOWED BY BUYING DEMAND ON THE STRENGTH OF THE MOVE IN THIS VOLATILE MARKET.

From there, a breakout above the triangle's resistance (diagonal , downward sloping line) would create a whole new herd of momentum chasers driving price even higher as the bid up a market in which supply has been already bid up by a short squeeze.

HOWEVER, THE FIRST MOVE SHOULD BE TO THE DOWNSIDE AND THE SCENARIO DESCRIBED ABOVE IS A GUT FEELING BASED ON WHAT I SEE AND WHAT WE'VE SEEN, THE WAYS WALL ST. OPERATES BY USING TECHNICAL ANALYSIS AGAINST TECHNICAL TRADERS.

 The daily 3C chart is a very strong timeframe with an exceptionally strong leading positive divergence in side the triangle so someone has been accumulating, all they need is some upside momentum to create a major profit and in the course of doing so, create another opportunity to buy more gold on the cheap and in large supply as described above in a head fake move / Crazy Ivan.

 Note the 2 hour chart's divergences, accumulation at the lows and as price rises there's distribution, just enough to send prices back to the lows. This 2 hour chart's most recent leading positive divergence may have you wondering why I like GLD as a short, remember I used options which I almost only do if I expect a trade might be short in duration, thus the added leverage gives me the profit possibilities to make it worthwhile.

 When we get to a more detailed 30 min chart we see not only the accumulation of the last area of lows, but fast and strong distribution in to the rise in prices which is why I believe the scenario laid out above is just as reasonable as any.

 The 15 min chart confirms the 30 min and our most recent divergence is negative among longer term positives so a break below support creating sling shot momentum looks to be high probability and using puts/options' leverage should make the trade worthwhile.

 The 5-min chart shows the same thing so we have good confirmation among multiple timeframes.

 And as for timing, the intraday 3 min chart is already leading negative, so timing which is essential when trading with options, looks pretty darn good here. There may even be some sector rotation out of flight to safety/inflation hedge gold and in to risk assets/equities as the F_E_D has been talking down their concerns about inflation,  remember gold is bought on INFLATION EXPECTATIONS.

And the 2 min chart shows an in line status followed by a sharp leading negative that never recovered, if it had 3C would be at least at the highest point on the chart or at a new high.

All in all, I like this position a lot and there may be additional time to get in if you find it appealing as well.