July 29, 2013
Chad Karnes, Chief Market Strategist
Gold has rallied for three weeks now. Is the decline over?
If you ask the gold bugs they certainly would say so, but of course they are biased and have been trying to pick the precious metals bottom since 2011. Some of these supposed “experts” have been wrong for over two years now and are sitting on some very large paper losses. For more on these experts’ picks gone horribly wrong see another recent article of ours entitled, “Ignore Gold Experts”.
We prefer a more balanced and unbiased approach to our investing.
A Look into Gold’s Recent Past
In the ETF Technical Forecast published 5/12 on ETFguide.com I pointed out the “kiss of death” that gold had just completed. The chart below was provided to our subscribers along with the following alert:
“Gold’s relief rally has stalled as expected at the previous support turned resistance (shown in green). The expectation is for it and silver to eventually make new lows as the recent rally has all the hallmarks of just a gap filling relief one. The gap created at 1470 has now been filled.”
The kiss of death held, new lows were made, and we helped subscribers ride the precious metals (NSEARCA:IAU) down over 15% capturing astronomical returns through our recommendation of put options on the miners (NYSEARCA:GDX) and silver (NYSEARCA:SLV) as well as buying inverse levered ETFs such as the Direxion Daily Gold Miners Bear 3x (NYSEARCA:DUST). Our multiple gold and silver trades resulted in gains from 29% to 525%.
Unfortunately for gold bulls, a similar “kiss of death” may again be occurring in gold prices.
But, fortunately for those of us who are unbiased, it may be offering a high probability trading opportunity.
Another Gap Fill?
The chart below provided to subscribers on 7/24 shows a similar setup to the last dead cat bounce in early May. After a fast and furious selloff then, gold and silver meandered their way back up to a price level where sellers were waiting to exit positions. That previous level as shown on both charts in green was $1470 on gold and $144 on GLD.
Once those price levels were reached, another sharp and fast decline occurred in late June setting up another large open gap in price as shown by the shaded area in the below chart.
Notice the similarities between the two shaded areas? Each decline sported an open gap and each eventual relief rally took price back to the beginning of that gap, where resistance resided.
This week, GLD (NYSEARCA:GLD) and Gold prices have meandered back up to that key resistance level of $130 (GLD) and $1350 (Gold) as shown by the black arrow.
Why is the $130 level now so important?
Because it is where the previous declines in April and May found support and is a level where buyers would finally start to breakeven again, more likely to cut their losses and get out while the getting is good. Everyone who bought gold and silver in April and May are now losing money and are likely looking to get out of the trade.
This price level presents that opportunity for a smaller loss.
There are also many trapped traders in the blue shaded area that have finally gotten a chance to buy and/or sell and is the reason gaps eventually attract prices. Open buy and sell orders still linger in those areas and are often eventually filled. Now that they are filled, the market can move in its more natural direction, which at this point is down.
Letting price be your guide on gold (NYSEARCA:NUGT) and silver (NYSEARCA:DSLV) is extremely important here as the metals show us if they have enough support to overcome resistance levels that previously rejected price.
As of this week the gold gap has now been filled (we are following a somewhat similar gap in silver (NYSEARCA:AGQ) as well). It is now very important for gold to rally beyond $1450 ($130 GLD).
If it can, the recipe will be in place for a shift in the short term trend back to up, and it may offer a tradable long. With sentiment starting to reach such bearish extremes, there also would likely be room for price to continue to run as shorts cover and buyers enter.
However, if prices are rejected here, just as they were with the previous “kiss of death” in early May, we should expect another new low in prices.
The ETF Profit Strategy Newsletter and Technical Forecast focus on actionable and high probability profit opportunities on all the major asset classes. In the latest Technical Forecast we have identified high probability trade opportunities that will profit whether the metals can overcome resistance or if they decide to blow us another kiss of death.
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