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

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

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

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.

GOLDvsSPY 1024x592 Don't Chase Gold Further Into the Hole    Not Yet, Anyway

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.

GLDlongerterm 1024x652 Don't Chase Gold Further Into the Hole    Not Yet, Anyway

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.

GLDdaily 1024x960 Don't Chase Gold Further Into the Hole    Not Yet, Anyway

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.


Article printed from InvestorPlace Media, http://investorplace.com/2013/02/dont-chase-gold-further-into-the-hole-not-yet-anyway/.

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