Gold Under the Magnifying Glass (NYSE:GLD)
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
- 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
- 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.
- 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.
- 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.
Analyst, Oakshire Financial
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