The impressive, long-term uptrend in gold (from 2005 to 2011) appears to be reaching an end. Since forming an all-time high in September 2011, SPDR Gold Trust ($GLD), a popular ETF proxy for the spot gold commodity, has merely been oscillating in a sideways range. However, it appears that a definitive move lower may be on the horizon in the coming weeks.
On the weekly chart of $GLD below, notice that the ETF attempted to break out above key horizontal price resistance in October 2012, but was unable to do so. As such, $GLD formed a significant “lower high” on its long-term chart. Nevertheless, there’s still a major base of horizontal price support around the $150 level:
The next near-term move in $GLD could be a bounce into resistance in the $158 to $160 range. In this area, there is new resistance of the prior lows from December 2012 and January 2013, as well as resistance of the 10-week moving average (roughly the same as the 50-day moving average) and the 40-week moving average (approximately equal to the 200-day moving average).
If $GLD bounces to this level and stalls, it will form a second significant “lower high.” This would be bearish and could easily lead to a breakdown below major support at the $150 area on the next move down.
Another possible scenario for $GLD is that it fails to bounce much higher and simply breaks below its four-week base of support (below $150) without first forming another lower high.
Regardless of how $GLD plays out, we have added this precious metal ETF to our internal watchlist as a potential short sale entry in the coming weeks. Traders with non-marginable cash accounts (meaning they can’t sell short) could simply buy an inversely correlated “short ETF” (such as $DGZ) instead.
A short sale entry into $GLD would be based on whichever of the two scenarios occur first: a bounce to the $158 to $160 area that stalls OR a breakdown below the $150 support level that subsequently bounces into resistance. As always, we will give our newsletter subscribers a heads up with our exact entry, stop, and target prices if we add this swing trade setup to our” official” watchlist. But for now, we are waiting to see how the next near-term move plays out.
As a reminder, we never sell short into strength. So, even if $GLD bounces into resistance of the $158 to $160 level, our trading rules are such that we must subsequently wait for the first big gap down or significant down day that follows. Entering a short position while a stock or ETF is still rallying has a very high risk of getting your stop run. The much lower-risk entry point is waiting for the price to start heading back down, thereby immediately putting the odds in your favor.
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