GLD Update (Gold)

Earlier this week I posted, TRADE Idea (SWING) Gold Short or GDX Short/ DUST Long and placed the order for the tracking portfolio, but never got filled. In any case, I have recently expected a pullback in gold for several reasons, the post above outlines a few.


If you have been following our gold analysis which I find to be kind of fun being a pretty well known fund manager who also runs a newsletter site and was a huge gold bug at the time, asked my opinion of gold in 2011 wanting to hear the party line at that time, that I thought it was the best thing since sliced bread. I had told him that our recent analysis had not only showed gold peel away on the upside from it's trend of holding the 150-day moving average for the previous 2 years and that I viewed that as a bearish event even though it looked bullish as prices moved in a more parabolic fashion to the upside. I told him our 3C data indicated a top and that gold would enter either an Intermediate Dow trend or a Primary Dow trend, either way, both to the downside.

This particular person who I would have loved to make some connections with as I was interested in starting my own hedge fund at the time and could have used some connections and help, pretty much laughed me out of the email chain, but in the end we were right and from what I understand, he took some pretty big losses as he , like all others before him who fell in love with a bubble, was sure that this time was different which is the sure-fire sign of a bubble.

Here's a brief look at Gold and our history as well as projections both long term and short term as in the post linked above from earlier this week.

 This is a weekly 3C chart of GLD with Stochastics on the bottom, you'll notice I use some odd time settings with oscillators, usually much longer than normal like this 30/4/5 setting.

I've backtested every trading system I've ever read about and was able to program in to Worden's BackScanner and found there wasn't a single one out of some 100 books on Technical Analysis in my library that could beat the market consistently without some discretionary intervention, in other words as a pure systems trading approach, they all failed at some point without inserting yourself in to the decision making process at some point, which was against the point of the system's approach.

I backtested hundreds of my own creations as the goal was to take myself, to take ego and emotion out of the trade and simply rely on rules. I found VERY few that beat the market and the only ones that did so, had rules and drawdown so intense that even though they ultimately made money consistently, I don't think anyone would have the stomach to tolerate the emotional drain of the drawdown and would end up breaking the rules, thus invalidating the system and taking huge losses in the process.

However one system that did show promise was to use Stochastics , but rather than to sell at overbought readings of  > 75/80 and buy at oversold readings of <25 and="" as="" bought="" box="" chart="" column.="" far="" in="" left="" like="" long="" of="" ones="" only="" overbought="" p="" readings="" stayed="" system="" the="" they="" to="" yellow="">
Likewise, only short the stocks that were trading in an oversold area for a long period of time, not just to short any quick dip below 20 or buy any pop above 80, but to play the Stochastics trend and as you can see with gold, it worked as it did with most assets as this was showing a momentum asset that had that strength or weakness trending.

At the red arrow you can see a Stochastics divergence which would have been a sell signal , there's also a 3C divergence which is the one we saw after price had peeled away from the long term trend of following the 150-day moving average, a change in character that led to a change in trend. Since that top, our forward looking forecast was for either an Intermediate or Primary Dow Theory downtrend and as you can see, we were right on that as well, also having one of our biggest,best performing and quickest options trades in GLD on 2/29/12.

 Since, we saw something over a year ago that suggested gold maybe found a bottom and might form a base, we weren't sure if it would be a short term counter trend rally or something larger. As it turns out, thus far it has been something larger as this daily 3C chart of gold shows with an increasingly strong positive divegrence in to 2015 and through 2014.

I do believe there's some more work to do on the base before gold can enter a primary uptrend again, but I think it is heading that way. We called for a pullback in gold in January at this negative divegrence , but were looking for a spot to buy the pullback. I think we found a short term swing buy, but not a primary trend buy yet. As you see, gold did pullback as forecast, although it took a bit longer than expected.

As I like to use multiple timeframe analysis, lets keep looking to uncover more of the story...

 This more detailed 30 min 3C chart shows the pullback area in red and the expected accumulation in to the pullback making for a decent long entry. However I have also been recently calling for a pullback of this most recent move up, thus the linked post above from earlier this week.

This 10 min chart doesn't have as strong of a signal as the 30 min chart above has, but it has more detailed signals and shows us different trends all occurring at the same time, whether you make money trading them depends on whether you align your trade with the appropriate trend. We can see the base/accumulation area of the January pullback as expected so this would have been the buy zone and I believe we did have a buy out on gold until recently.. Note the negative divegrence to the right. This divegrence doesn't show up on the 30 min chart above this one because it is not that strong. This tells us that the trend in gold is strengthening, but near term it needs to pullback and probably so it can continue accumulating as smart money buys on the cheap, they don't chase prices higher.

This 1 min chart shows the timing of the pullback best, it's not a strong signal, but an excellent timing signal and as gold gapped up, possibly creating a short term exhaustion event, in to a negative divegrence, the probability of a pullback near term is high and the probability of that pullback being accumulated to form a stronger long term base is also high.

This daily GLD price trend shows the move down and a double bottom base that is nearly complete, it looks like it needs one more pullback to the trendline, probably a stop run below that support level to shakeout any weak hands and build a bear trap for upside momentum as a head fake / stop run is one of the last events we see 80% of the time before the true reversal (to the upside) at which time I want to be long gold.

Thus the current short in gold is a short term move to the bottom trendline (white), but after that, I'd be looking for confirmation of our forecast and looking for a longer term trend trade long.

Perhaps I could make this more clear using fewer charts of gold futures...

 Daily chart of Gold Futures and 3C showing several years and as the downtrend subsided (Changes in character lead to changes in trend), a base with increasingly stronger positive divegrences started forming and has continued.

This is the larger primary trend view and is bullish.

This 60 min chart shows the base formed since the January pullback forecast which we expected to see, we just wanted to confirm accumulation on the pullback before buying it. The trend here is strong and confirmed, but there are other smaller trends at work.

This 30 min chart shows the upside confirmation at the green arrow that the 60 min chart shows, but there's a weaker negative divegrence now, this is the SWING trade pullback that is linked above as a trade from this week. Note it is not on the 60 min chart or not yet because it is not the dominant signal, the dominant signal is accumulation, but if prices move too high above the accumulation zone, smart money will let out some supply and force prices back down, that's the swing trade short and once prices come back down and show further accumulation, the base should be wider and wide enough to support a primary trend trade long position, which is ultimately the biggest trade or the big picture trade. As I was explaining yesterday, there are multiple trends all happening at the same time, just on different timeframes and just like you need a screw-driver to turn a screw or a hammer to hit a nail or a saw to cut wood, you have to align the correct trade with the correct trend. You could go long as a trend trade here and in a year not know the difference, but why not try to get the best price available?