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Gold Under the Magnifying Glass (NYSE:GLD)

05/13/10 by  
Filed under Bourbon & Bayonets

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The big news this week, after last week’s ersatz market crash, is the price of gold.  Gold, as many of her buggerers will tell you, finally hit new U.S. Dollar highs.  After five and a half months of backing and filling – and hitting new highs in a number of foreign currencies – gold has now registered a bona fide technical breakout.

Or has it?

Here is a chart of the SPDR Gold Trust ETF (NYSE:GLD) for the last six months:

Close-up Gold Analysis

  1. According to the strict technical reading, a breakout occurred (on the GLD) once the former December, 2009 high at 119.5 was bested.  At that point, a higher high was registered against the ‘higher highs and higher lows’ principle of technical trend analysis.  By that principle, so long as a security is making higher highs and higher lows, the trend remains bullish (see next chart for a graphic example of the principle).

Yet technical analysis also recognizes occurrences where the market reverses after making new highs such as this, turning about to enter into a bear phase after the failed breakout.  The pattern is variously termed a ‘bull trap’, ‘failed breakout’ or ‘failed retest’ and nearly always portends a strong drop in price.

Will this happen in gold’s case?  It all depends on the retest.

A retest is a return to the breakout resistance level, in our case, to 119.5.  At that point, the former resistance level should serve as support, and price action should ensue above the support line.  That’s the bullish case.

Should the retest fail, however, and support at 119.5 break, with the ensuing price action occurring below the support line, technical traders, at the very least, would view the action negatively.  It’s likely they would sell.

Moving Average Spread is Dangerously Wide

  1. Moreover, we now have a situation of such extended bullishness that the current price action is dangerously far from its long term moving average (in yellow, above) – nearly as far as it was in 2008, after which gold declined 34% in a period of seven months.

Taken alone, this indicator proves little.  It merely points to a historical precedent that twice proved overbought for the yellow metal (see chart below).  Taken together with other, technical worry signs casts some doubt on the upside potential of the current move.

  1. Finally, Relative Strength has declined from the December highs while the price of gold has risen.  This is termed ‘divergence’ and often indicates that an upleg was of a weaker nature.
  1. RSI is also at objectively high levels, indicating a potentially overbought situation in the making.

Does all this mean that gold is going to fall?  Absolutely not.  It just means that we have a conditional bullish signal and any violation of support could prove terminal for the current bull move.  Go long, but keep your hand on the rip-cord.

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How long do we have to worry about this?

We would suggest any retest could take up to three weeks – in exceptional cases twice as long – to transpire.  Until then, be wary.  Be long if you like, but be wary.

Here is GLD for the last two and a bit years:

From Goldville To Tinseltown – Potential Options Bonanza

In other market action, an interesting trade is shaping up between the broad market S&P SPDR ETF (NYSE:SPY) and one of the most volatile stocks in the index, Las Vegas Sands Corp. (NYSE:LVS).

As regular subscribers to Oakshire Financial know well, LVS has been offering huge options premiums for an extended period, and it had been our penchant to play those options on the long side, as part of a covered call strategy, whenever we felt her premiums were truly bloated.  We made some good money there, too. CLICK HERE to read our article.

Now we see a potential breadwinner in a long-short play using LVS puts and SPY puts.  Remember, buying one and selling the other for the same price means you pay nothing to execute the trade outside of commissions, and you profit while the spread between the two options’ values widens.

Tinseltown’s LVS appears to us as weak of late.  Here’ the action for the last year:

Against the S&P, we’d take the index in a heartbeat – in a downmarket, that is.

You might consider doing the same.

Best investing,

Matt McAbby
Analyst, Oakshire Financial

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12 Comments on "Gold Under the Magnifying Glass (NYSE:GLD)"

  1. frank on Thu, 13th May 2010 6:48 PM 

    nice article…was thinking gold should experience some difficulty in the 1275 to 1285 area

  2. Dr. Longuet on Thu, 13th May 2010 6:53 PM 

    So what’s the trade? Buy(LVS)put @ what strike, what month and sell(SPY)put? Could you be specific?

  3. j on Thu, 13th May 2010 7:07 PM 

    Alas, the last understandable tanngible asset class. It will continue it’s upward climb statistically unabated. Globally, fiat currencies are headed for a great fall. As before the “experts” will have missed the signals. Study history in failing contries to see what is coming. Just remember it is a global “effort” for the good of us all!

  4. MIKE on Thu, 13th May 2010 7:34 PM 

    What paper gold did, does or is going to do has no impact on the price of physical gold. If you want to know the true market value of gold or silver, go to ebay and see what people are asking and what people are willing to pay.
    The paper gold is a total scam, where there is 100 times more paper than actual gold!
    Good luck trying to take physical possesion of your paper gold!

  5. Gene Zawadzki on Thu, 13th May 2010 7:39 PM 

    Most technical analyses look like lagged, distorted mappings of the raw price data. All the conclusions from it are the same: “If the price goes up (down), it may or may not continue.” Not a prediction at all. No wonder there are no rich technical analysts. To predict the future from the past, if at all possible, a detailed analysis of the effects of past “events” (earnings, market shocks, etc.) is needed. These patterns characterize each price history. Their recurrence in the future requires analysis techniques that don’t depend on lags: in high-precision spectral analysis (not Fourier-based) the preservation of nearly exact phase and period information for every significant cycle in past data.

  6. fallingman on Thu, 13th May 2010 8:37 PM 

    Interesting analysis on GLD.

    Yes, it almost goes without saying that there could be a sharp pullback. You make a pretty good case. Let’s call it at least a 50-50% chance if not better.

    What I would suggest you consider, however, is that the market could very well be entering some blue sky and parabolic liftoff territory, having made new highs with no one holding at a loss, and by being out, you could miss one hell of a ride, a la the late 70’s…early 1980. We older folks remember and will tell you younger guys that there’s no bull market like a raging gold bull market.

    Technicals won’t mean much when the game becomes about millions fighting to get some money insurance in the form of metal, even as speculators follow the momo, driving things higher and higher. There ain’t that much metal out there and an avalanche of demand is coming. The only question is when.

    My advice is don’t be stupid and blindly chase with high risk plays, but don’t be too cute either. When the mania comes, it’ll leave a lot of techno-hounds wondering how the market could have stayed that overbought for that long with nary a breather.


  7. Dan Brown on Thu, 13th May 2010 8:41 PM 

    Good analysis on gold, Matt. Another indicator that agrees with the picture you’re painting is sentiment. It’s hard to imagine who’s left to push gold higher when 95% of investors and traders are bullish on gold! The U.S. dollar isn’t in agreement with gold’s rise either. Something has got to give.

  8. S.D. on Thu, 13th May 2010 8:47 PM 

    Thank you for the very nice charts, and valuable information.

    Just want you to know that it is a pleasure reading your material which is so very professional and without any gooobli-gook.

    Keep up the good work.



  9. MICHAEL DA SILVA on Fri, 14th May 2010 2:32 AM 

    What do you mean by the “spread between the two option values widen”?
    I’m a newbie to options and am not familiar with all the jargon.

  10. NIck on Fri, 14th May 2010 5:45 AM 

    When you compare the metals price to the 80″s run up you are not taking into consideration all the facts. First the debt was not coming home to roost then, like we see in Greece, Spain, Italy, and yes, Caleeforna (spelled like Arnold says it). The next country to fail is, at least in my opinion a major state in the USA. Think aobut that. In the 80’s the fed had all the cards to play to stop a inplosion. The fed has used up all the cards now. Another thing you did not consider in your comparison, there was no European Union that is in discord at the moment in a big way. Then there is the quesiton of inflation since the 80’s the lie of our government with the truth being, inflation is more than triple what we are told by government since the 80’s. Now talk all the people in Eurpoe that are making obvious the lie of the Euro Currency, and they are purchasing metals and they know the way paper money is so poor from living it during the two World Wars when money was GOLD not paper, and the Asian developing countrys holding all those dollars from the USA giving them our factories that are promoting the Asian to purchase metals as individuals and the list goes on and one. I think you get the idea. My opinion is metals have no limit on the up side long term, yes no limit, gold at $5,000.00 or $10,000 who knows but it is UP, UP, and AWAY, like Superman until we get a reserve currency that does not steal from the citizen with devaluation like the US Government did to the dollar for 60 years. Oh Yes, another thing, the situation is now causing the saver to fund the situation by paying little or no income on savings, a theift in itself promoted by governments to steal more from the just to give to the social masses??? Sounds like a very different world then in the 80’s to me and the management of money is taking a very different turn also.

  11. james j steinhauer on Fri, 14th May 2010 8:03 AM 

    if i understand this play,it is to sell the spy put and buy the lvs put at about the same cost to cancel each other and watch the difference widen to profit.correct? thanks for reply

  12. Joseph H. Kress on Fri, 14th May 2010 8:05 AM 

    I predict that the dollar and the euro will look like the 1921 German mark note. Gold will be the substitute for what is nor Europe and US money, and as that happens gold could be the bench mark as the basis for all currencies world-wide. For that reason I recommend buy the physical metal and while you’re at it invest in silver a runnerup that will always be better than unbacked paper.

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