Diary of a Financier

Shakeout Underway, Gold Threatens Regression into Correction

In Capital Markets on Wed 22 Dec 2010 at 08:34
  • We closed GLD longs in early December due to divergence.
  • A failure to rally could cast this GLD shakeout into a longer-term correction.

We blew out our Gold (GLD) positions in the first week of December when I noticed confirmed divergence in the daily chart.  While we missed the absolute pinnacle in the spot price above $1400, Gold has pulled back below our exit point, and I’m still sitting on the sidelines expecting a lower correction.

The daily chart holds the key to Gold’s near term fate.  Note that while the Slow Stochastic indicates renewed upward momentum, MACD must bullishly cross its signal in this cycle to save spot Gold from collapsing:

Gold daily chart

There’s much ado about this chart.  Between the middle of October and the beginning of December, my markings indicate the divergence in MACD & RSI with the price action, which all led me to close our GLD positions.  With a small pullback already realized, the daily chart is back in an upward cycle, but if MACD fails a bullish cross of its signal, I expect it to continue along its downward slide–perhaps even threatening a drop into sub-zero (negative momentum) territory.  RSI confirms this crossroad.

Much the same slide led us to close our long GLD positions back in June 2010, where I’ve also indicated the divergence with my markings.

The weekly chart echos the importance of Gold holding its line:

Gold weekly chart

Here we find divergence in the SStochastic with MACD on the brink of a bearish cross, which has the potential to take this Gold shakeout into a month-long correction.

I would recommend that all Gold bugs monitor these developments closely.  If you’re looking for one of those fundamental red flags, I’ll save space in this Diary entry (and perhaps revisit the fundamental argument another day) by referring to Josh Brown, who essentially queries: ‘why are leveraged Gold miners announcing dividends?  Not only is it a volatile business, but your shareholders don’t want your cash, they want your physical Gold!’

–Romeo

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  1. […] pitfalls.  In terms of contrarian-gone-consensus themes: I’ve sat on the sidelines for Gold since December’s highs, but I’m still holding onto a big floating rate bank loan position we initiated in October […]

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