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Don’t Chase Gold Further Into the Hole — Not Yet, Anyway

With support nearby, the reward isn't enough to justify the risk


Since I last banged my drum on the state of gold in late January, the SPDR Gold Shares (NYSE:GLD) reached — and, in fact, undershot — my target near the $155 level. At least in some minds, a combination of a better economic backdrop and a rising U.S. dollar took the near-term bottom out of gold on Feb. 15, and in the process silenced the gold bugs and other self-declared “long-term trend followers.”

Much like in August 2011, the spread between gold and the S&P 500 keeps widening, although back then the chart was inverse (gold was up and equities down). As I will discuss shortly, until gold finds better confirmed footing, it will have a hard time putting together a significant mean-reversion move to tighten the spread.

The following analysis very much reflects technical analysis 101, and is something I think investors and traders alike don’t focus enough on: Long-term trends don’t snap in one day — they often first move sideways before really reversing in the opposite direction.

Case in point: Through a longer-term lens, the SPDR Gold Shares ETF broke its uptrend in spring 2012. However, instead of immediately putting its gears in reverse, we have “enjoyed” a lot of sideways shuffling. A series of lower highs has so far only led to the retesting of a lateral support area near $148-$150. In other words, the lower highs have yet to shower us with a lower low to confirm a change in the longer-term trend.

Closer up, on a daily chart of GLD, note that from a momentum point of view, the recent selloff might have exhausted itself. Another 2% to 3% of downside would get this ETF to the aforementioned support zone.

Given the rather steep selloff in recent weeks, it’s somewhat unlikely that the $148-$150 support zone would be sliced through immediately. More likely, some backing and filling is in order for the next few weeks to either establish a better low to trade against, or for price to settle enough for sellers to again be able to push the price of gold lower. At such a point, from a swing-trader point of view, risk/reward will get better again.

I think the risk/reward of chasing the downside here has worsened significantly. Enjoying a libation from the sidelines looks much more attractive.

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter here.

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