Since we last looked at
SPDR Gold Shares ETF
it was in a
. We expressed our concerns then about the likelihood of prices retracing given that they were at the upper end of the long-term channel line and in the midst of a suspect bullish advance since $1,000.
Since then, the price of the yellow metal has collapsed and the gold ETF closed Thursday at $107.34 from a high of almost $119.54. So, where might gold travel to now? To make that decision, let's take a look at the charts.
On the long-term time frame, little has changed over the past three weeks. So let's begin with the intermediate-term time frame. See the weekly chart above.
There are a number of items of interest starting with the suspect break of the swing point that resulted in a suspect bullish trend. As we have discussed before, if a trend becomes suspect it usually gets retested and either succeeds or fails the retest. A success would be for prices to trade back to the area where the suspicion first began and to do so with less volume. If prices then close back over that area it is a successful retest. I call that regeneration.
The other possibility is that the test fails, which means that volume expands into the retest area rather than contracts. A failed test simply means that price wants to head even further than the retest area.
The retest area for GLD is the breakout bar from the week of Nov. 3. The high of that bar is $106.70 while the low is $103.72. Either end of the bar is fair game. As we can see from the chart, volume has swollen on the way back down and unless it slows down soon, the test will fail once it occurs.
The good thing about the way this is setting up is that the volume is coming out of the equity before it reaches the retest area. If you are bullish, that's what you want.
To try and determine just how far this retrace may take the GLD price, we turn to the short-term time frame.
Here I have duplicated that retest zone from the weekly chart. Within that zone, I've drawn a smaller "most likely target zone." It is "most likely" because it is anchored by high-volume daily bars. High-volume bars are what will stop price decline, if anything will.
Thursday the market released some additional information to those listening. After a straight down move off the top, the three-day price respite was crushed with a vengeance as the swing point from Dec. 11 was erased with volume. When a swing point is taken out and volume expands, that confirms the trend. In the case of GLD, that means we now have a confirmed downtrend on the daily chart. This is what we expected, and now it is happening.
The break of the swing point also allows us to measure the AB=CD pattern now that the first three points are known. The measurement suggests a target of $99.81 which will result in the filling of the gap created way back at the beginning of October. That would bring prices right to the bottom of larger retest zone.
From a trading perspective, one could now short GLD if it was to bounce into the $108.75-$109.50 area reasonably soon. The protection stop would be around $110.50. The risk-to-reward is heavily in your favor as is the likelihood of the trade succeeding. In trading, that's the best of both worlds.
As an aside, gold stocks are in for the same ride lower. If the test at the lower levels proves successful, then the gold market will once more provide the more astute and patient traders with another long-term opportunity. Do note that when you get this kind of a hard and fast retrace lower, it creates a volatile trading market short term with larger-than-average trading ranges. For a trader, range volatility is paradise. The other consequence is that the time it takes to build another floor to go higher is elongated so don't expect GLD to trade above $114 anytime soon again.
That's the view from this trader's chair. Until next time, keep trading the charts!
At the time of publication, Little had no positions in the securities mentioned
L.A. Little is an author, professional trader and money manager who writes daily on
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