The popular SPDR Gold Trust (ETF) (NYSEARCA:GLD) — despite closing well off its intraday highs on Wednesday — remains 16% higher for the year-to-date, helped at least in good part by a global risk-off trade. I’m still bullish on the GLD ETF for 2016, but in the near-term, things do look overbought.
Ask any seasoned active investor, and they will tell you that for the most part the alpha (and money) is made by getting the intermediate-term trends (three to nine months) right. As such, for the most part I try to only “play” in the direction of those intermediate-term trends, which for the GLD currently is higher.
However, from time to time, when a big and obvious bearish reversal rears its head, I will look to play quicker counter-trend moves for cash-flow generation purposes, which is the opportunity I see setting up in GLD today.
After a vicious multiyear bear market, gold began to show serious signs of downside exhaustion through the second half of 2015, with many momentum oscillators such as the Relative Strength Index at the bottom of the chart making marginally higher lows.
Such positive or negative divergences between price and momentum can last for lengthy periods of time, but when they ultimately win the battle, then price can start to move in said direction swiftly if not outright violently. Looking at the multiyear weekly chart of the GLD ETF, we see that the year-to-date rally has now pushed it out of a multiyear downward sloping range, with the RSI still having plenty higher to go before more meaningful overbought readings begin to appear.
Higher is the primary trend, so I’ll be buying dips in GLD until further notice.
However, every intermediate-term trend is made up of pullbacks as traders’ greed leads to shorter-term overbought readings. The steepness of a slope in any time frame can only last so long before gravity begins to work for a period of time.
Case in point for the GLD, note how the steep rally in recent weeks finally came to a head on Feb. 11 when the ETF gapped higher but closed well off the intraday highs. Gold then consolidated for a few days and yesterday attempted one more rally, which once again was met by selling, resulting in another daily close well off the intraday highs. Bulls clearly are getting exhausted around the $120-$122 area and so far have been unable to push the GLD ETF above this zone.
Also note that the GLD ETF is well extended above its 21-day moving average (yellow line) as well as meaningfully overbought by the MACD indicator at the bottom of the chart.
Active investors and traders could now look to lean short the GLD ETF using Wednesday’s highs near $120 as a stop-loss and a price target around the $112 mark.
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