|December 19th, 2011, 03:51 AM||#1 (permalink)|
In previous articles, I provided fundamental and some technical evidence that not only is the gold bull market intact, but that the fundamentals for higher price appreciation remain strong as well. Yes, there has been some technical damage, and yes, it is enough to warrant caution. On the other hand, investors need to remain alert as these kind of buying opportunities don't come along all too often in a bull market. In this article, I will take a look at the technicals of the SPDR Gold Trust ETF (symbol: GLD) utilizing long term monthly charts. In follow up articles, I will drill down on the weekly charts to determine where the stress points will be and where a buying opportunity might develop.
Figure 1 is a monthly chart of the GLD. Since 2008, GLD has been in a strong uptrend, and price still remains within the uptrend channel. 5 months ago, price did try to break out of the channel (blue up arrow) and go parabolic, but that failed move (red down arrow) led to the current price action.
Figure 1. GLD/ monthly
Figure 2 is another monthly chart of GLD, and this time I have added some negative divergence bars (pink labeled). In this instance, these are negative divergences between price, which is heading higher, and an oscillator used to measure price, which is headed lower. While negative divergences are often seen at market tops, their presence does not guarantee a market top. (Read the last sentence again because most technical analysts types don't understand that concept.) My research shows that negative divergence bars imply slowing upside momentum, and the highs and lows of the negative divergence bar will often serve as the highs and lows of a range that follows the negative divergence bar. So you get a negative divergence bar; price momentum slows; subsequent prices are contained within the highs and lows of that price bar until you get a break out from that range. And this is what I have tried to convey with the gray boxes on figure 2.
Figure 2. GLD/ monthly
Several caveats. Look closely at the 8 negative divergence bars on this monthly chart. In 7 out 8 instances, the lows of the negative divergence bar were tested but price never closed below those lows on a monthly closing basis. The recent negative divergence bar has a low of 154.19, and it would be my expectation that prices will close above this level by month's end. The high of the second most recent negative divergence bar is 151.86; this would be considered a support level. Last week's sell off low: 151.71.
Going forward, it is my expectation, based upon the failed breakout and the clustering of multiple negative divergences, that GLD will remain in a range bound period for a while. If prices fall out of the trend channel line or below 150 ~ ish, then all bets are off. If this analysis is wrong, then bull market is really over.
On the other hand, I really do like the fact that the fundamentals for gold have not changed, and prices are sitting at support as defined by a long term rising trend channel line and by the highs and lows negative divergence bars.
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