On Jan. 7, I said those looking at gold from the long side might have some time left to initiate their position for the next more meaningful upswing. In the meantime, gold has staged a small relief rally … but over the past few days, it has already begun to weaken again.
To me, that marks a perfect time to revisit the charts.
The broad divergence between stocks and gold (gold lower, stocks higher) — using the SPDR Gold Trust (NYSE:GLD) exchange-traded fund as a proxy — from recent weeks continues, and at some point might offer a mean-reversion trade for those patient enough to wait.
The latest up-swing on the chart of GLD — which measures from the lows in may 2012 up to the highs in early October 2012 — retraced to the important 61.8% Fibonacci support line in December. However, the ensuing 3% bounce in early January looks weak, so as to potentially threaten the December lows near $158 yet again. Should said level be breached, there is no real support until the low $150s.
To measure a potential first downside target in case the December lows are breached, we must zoom closer into the downswing that started in early October 2012. The most recent swing within this downswing measures from the top in late November down to the December lows. The January reflex rally bounced the Gold Trust right up to the 50% retracement line of this swing.
A logical and conservative first target thus must be measured off this smaller swing. A simple 23.8% Fibonacci extension of the swing gets us a target near the low $155s, or about 3% lower.
Despite the fact that the correlation between the S&P 500 and gold has unhinged as of late, it might be too early for a mean-reversion trade. The near-term charts of GLD — and thus of gold — point the metal somewhat lower for now.
In other words, a break of the $158 area might signal more weakness in the near-term. Though that ultimately could serve as a better bottom-building process.