Stock analysis

Gold Reversal Could Pick Up Steam

Gold futures are pulling back after probing July 2016 resistance at $1,370 and could lose further ground in coming days, shaking out a large supply of weak-handed long positions while attracting equally weak short sales. This cleansing process should generate a low-risk buying opportunity ahead of a potential breakout that targets $1,500, where 2012 resistance could finally end the uptrend that started in December 2015.

Periodic shakeouts are inevitable with this unique financial instrument, even during the strongest uptrends. December rate hike odds have risen this week, putting a damper on gold, in reaction to an expected surge in GDP generated by Texas and Florida hurricane reconstruction. However, that uptick could be elusive, given massive uninsured losses as well as structural headwinds that are likely to weigh on inflation and the labor market well into 2018. (See also: What Drives the Price Of Gold?)

GLD Long-Term Chart (2006 – 2017)

The SPDR Gold Shares (GLD) bottomed out after the Sept. 11 attacks in 2001 and entered a dramatic uptrend that picked up steam into the second half of the decade, stalling in 2008 at the psychological $100 barrier, which aligns with $1,000 on the gold futures contract. A steep decline through the economic collapse cut through $70, cleaning out speculative positions ahead of a strong buying impulse that broke resistance in the second half of 2009.

The momentum crowd took control into September 2011, with the price of GLD nearly reaching $200 (and gold futures approaching $2,000), printing a parabolic top and beginning a downturn that accelerated into July 2013. A bounce at $115 made limited progress, yielding a bearish descending triangle that broke to the downside in the second half of 2014, generating a descending channel that continued into a six-year low at $100 in December 2015. (For more, see: When and Why Do Gold Prices Plummet?)

The instrument posted fabulous gains in the first half of 2016, lifting 30% into the lower end of 2013 and 2014 resistance between $132 and $137. That formidable barrier ended the rally, ahead of range-bound action between that level and support at $107, struck right after the presidential election. The current uptick is now approaching the 2016 high and could complete a multi-year basing pattern ahead of a breakout that reaches 2011-2013 double top resistance near $150.

GLD Short-Term Chart (2015 – 2017)

The fund has covered little new ground since 2013, when it bounced between $115 and $137. Bilateral swings since that time have reinforced resistance at the upper boundary, while support has now dropped to $107 due to the higher low posted in December 2016. There is no easy solution for bulls or bears with this complex pattern, which has posted a continuous string of lower highs since August 2013. (See also: Why Gold Matters.)

A buying impulse that mounts the July 2016 high at $129.59 will signal a bullish change in character, finally ending the three-year string of lower highs. In turn, that uptick may complete the multi-year basing pattern, favoring a breakout that faces significant resistance above $150. It is instructive to note that such a rally would generate a measured move target closer to $160, telling market players to expect a dynamic move that attracts the momentum crowd.

In the shorter term, the fund broke out above a 13-month trendline​ of lower highs in August 2017, establishing intermediate support between $121 and $123. The rally reversed within two points of the July 2016 high on Monday and could continue to lose ground while shaking out long positions. The 50-day exponential moving average (EMA) is lifting into the new support zone, raising the odds for a low-risk buying opportunity ahead of additional testing just below the $130 level. (For more, see: Using Technical Analysis in the Gold Markets.)

The Bottom Line

Gold is headed into a strong buying wave after breaking out above a trendline of lower highs but is now pulling back, exposing weak-handed long positions. This decline is likely to continue for a few weeks while offering a buying opportunity once it reaches new support between $121 and $123. (For additional reading, check out: Does It Still Pay to Invest in Gold?)

<Disclosure: The author held a long position in the Comex Gold Trust (IAU) at the time of publication.>