Buying and Selling Gold at the Right Time - Has Gold Topped? Part 3

By Brett Marsh - January 18, 2012 | Tickers: GLL, GLD | 0 Comments

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Is GLD Finding Support Or Bear Market Rally?

In our first piece on GLD we examined how buying GLD based on fundamentals or by using an investment theme alone can lead to huge draw downs in your account of 20%-50%. Using this type of analysis may be right in the long run, but terrible for timing your entries and exits.  In our second article we examined how to time your buying and selling of GLD by using the technicals.  We also pointed out the recent topping action in GLD and how to identify the red flags when they are developing.

An important point to understand is a stock or ETF doesn't top out or put in a bottom overnight.  This is especially true after a long defined trend.  Such topping or bottoming action can take weeks or even months to finally change direction and the trader or investor can be tricked or lulled into thinking this slow crash is really just temporary and instead a good time to buy.  It is critical that one remains unbiased and takes their emotion and opinion out of their buying or selling decision. The way that has worked well for us over the past decades is to read the sign posts on the chart and base your decision on what those posts are clearly saying to you. These signs are easy to identify if you know what to look for and will get you on the right side of what the big money is doing.  Remember, no matter what your opinion or analysis says when the big money decides to buy or sell you want to be on that side of the market or risk getting run over. You want to be able to identify the differences between a normal healthy pullback and major correction or trend change.

Longer Term Trends And Support

Typically when an uptrend is ending there will continue to be a struggle between the bulls and the bears for some time. One must take the buy and sell cues off these signs.  In the case of GLD we pointed out that in mid December it broke its 200 day moving average level for the first time in years.  This is typically a very bad sign since it shows us the bulls are no longer buying in mass at support levels and the bears or sellers are now taking over those old support levels and turning them into resistance levels. 

In the last article we left off highlighting how all support and momentum has been broken except for one last bit of support. This last bit of support we pointed out was the longer term uptrend line going back to 2008.

Let’s focus in on the chart of GLD.  The longer term trend line extends all the way back to 2008 and has held 6 times over the past 3 plus years.  The more times prices touch and hold support levels, the more relevant they become. In December, the first attempt to lower into the longer term support line broke just like it did back in July 2010.  The differences between the 2010 test and this recent test is we weren’t below the longer term 40 period moving average level (200 day MA) and today we are.  The good news this time around is by the end of the week this level held.  Those who looked at this line as potential support started to add to their positions at that level allowing GLD to close the week above those levels. 

Multiple lines of support

If we look back to the old May-July 2010 levels we also see that there is a convergence of support meaning we are seeing the longer term trend line and the old base high levels at the same price area.  When there are multiple support levels at the same or similar price levels, this greatly increases the odds of a support level working on the first attempt since there will be more likely be more bidders for different reasons based on their different strategies.

So now if we zoom in and look at the daily chart of GLD, we see it fell from $185.85 to a low of $148.27.  This is roughly a 20% selloff and tells us that GLD is in a technical bear market.  Picking up the red flags that occurred early September such as extreme bullishness, massive over buying, the high level of degree of the slope of the GLD chart and the nasty heavy volume reversal off the all time highs, traders and investors alike were able to pick up all the signs that a short term top was happening.

Now that we have gotten our correction in GLD and it has held initial support, how do we know if this is a buyable rally (safer buy) or nothing more than a bear market rally (dangerous buy).

Read Part 4 to see where GLD goes next.

Please email at brettm@betterstockentries.com with any questions.

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