Gold go bye-bye?

A few weeks ago I published a Chart School newsletter in which I discussed the prospects for gold. At that time, I recalled hearing about what a great buy gold was seemingly every time I turned on the TV or even went to a mall. “Buy gold”, or “We buy gold”, it was always one or the other. Well, should I?

So, I decided to take a look at gold myself to see what I could see. To do that, I decided to look at the GLD, which is the ETF that tracks gold and allows you to profit from gold without having to physically go out and buy a bar! Below is a similar chart to the one I presented in my previous newsletter:

At that time, you can see that the GLD was trending higher, while volume was contracting. This is what’s known as a divergence. Think of it as less and less interest as the price goes higher and higher. It’s as if there is nothing holding the ETF up and it could fall on it’s own weight. Although this divergence is not an immediate “sell” signal, it did tend to make me skeptical of gold’s recent rise. Well, it was not a surprise to see what happened next:

Not only did the GLD break it’s up trending support line, but when it broke, it did so on a pretty nice increase in volume. In other words, we didn’t just casually break that support. There was a heavy interest in getting out and the “big” money was making a move out of gold/GLD. Although we don’t necessarily need a pop in volume to go lower, it does add validity to the breakdown. Afterwards, the price of the GLD did exactly as expected after a break of support, it went lower. Recognizing that support break and increase in volume would have been a great short opportunity, yes? Well, please look at my updated chart:

You will see that the GLD had created another strong support, but this time at the $115 level. Again, the GLD breaks support and yet again on a heavy increase in volume. Based on what you know about support breaks, volume and the charts above, what might the GLD do next? More importantly, what might YOU do next?

The Tale of the Tape: The GLD has broken down again. Regardless of what all the talking heads may say, the GLD is telling me that it is going lower. This would appear to be a great time to:

  1. Short the GLD
  2. Buy the ETF – GLL, which goes up when gold goes down
  3. Short gold related stocks that also break support. Stocks to watch may be ABX, AEM, GOLD, RTP, FCX, AU, GG, etc

Waiting for the most opportune times that I have outlined above could provide you with the highest probability trading points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!
Christian Tharp, CMT