GLD Nearing Critical Inflection Point

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Gillie

NEW YORK ( ETF Digest) -- Traditionally, gold has had an inverse relationship to equities as a safe haven against dollar deflation, inflation and asset decline.

That was until gold had a fantastic run up after the '08 crash and was the daily talking point of the financial gurus. Then it hit the ridiculous from sophisticated sounding, well-dressed actors selling gold-plated wooden nickels on TV to pawn shops hiring street dancers dressed as clowns waving signs saying "We buy gold" at passing cars. Speculators piled in for fast money and fund managers were backed against a wall with clients demanding their portfolios be chock-full of gold. Of course, when those same clients wanted to get money out of the market still feeling the sting of '08, gold was summarily unloaded to cover redemptions.

Until 2005, gold was actually not that easy to own. Investors had to purchase physical gold in bars or coins and then have a secure place to store it. Gold futures were virtually inaccessible to the average investor. Enter the world of ETFs. Investors could buy and store physical gold at their fingertips on the keyboard with GLD. As this developed, investors could even buy leveraged gold positions and gold futures. As "what goes up, must come down," inverse ETFs effectively shorting gold came into existence.

Bear in mind, regardless of an ETF's holdings, they are, in fact, equities bought and sold on the open market just like any other stock.

SPDR Gold Trust (GLD) is the most actively traded ETF holding physical gold bullion.

Holdings are not listed in the above table because GLD holds 100% physical gold bullion.

With an average volume of 12.4 million shares daily, GLD is currently the 19th most actively traded ETF. However, with the extremely low volume we've seen in the overall market over the past weeks, GLD trading at only half its normal volume has moved up to the 9th most actively traded ETF on actual volume. That might give us a hint to the lack of participation in the overall market despite the recent melt up.

Current price of $159.90 puts GLD about in the middle of its 52-week range.

Because ETFs are actually equities, regardless of their holdings, they should adhere to the rules of technical analysis. I italicized "should" because this doesn't always hold true exactly, especially with inverse and leveraged positions or ETNs tracking non-monetary indices.

We'll need to look at both the daily and weekly charts to develop an analysis.

On the daily chart, GLD is currently in three technical patterns:

1) The red dashed line would be support for an inverted head & shoulders -- a bullish pattern. Should the price hold the neckline of the inverted head & shoulders around $156, we could see a short-term rally on this pattern.

2) The dark blue dashed lines form the current price channel over the past six months. This is a bearish channel. Should the price adhere to this technical pattern, we should find support around $144 and likely see a short-term rally up to the trajectory of the upper channel line. The bearishness of this declining channel over the past six months is confirmed by volume spikes on selling.

3) We have a wedge pattern developing with the dark blue upper channel trend line and the lower light blue longer trend line. This is a bullish pattern and should the price find support at the $152 level, it would be likely to break out above the dark blue upper trend line and continue in a longer bull market.

Any investment made should be coupled with "what's my time frame?" The longer the pattern in duration, the more it trumps shorter term patterns. The three patterns above are listed in order of their time frames (shortest to longest).

To analyze an even longer time frame, we'll look at the weekly chart of GLD.

On our weekly chart, we have a clearly defined multi-year upward channel. But this not a dead-solid-perfect guarantee. Here's why: notice in December last year, the price pierced the lower trend line. This is like having a rip in a trampoline. The next bounce could be a very dangerous situation. We also notice that previous bounces off the lower trend line were preceded with a soft downward movement with some lateral price movement in the process. This is not the case in our current downward trajectory.

Back to our trampoline model, in August last year, we had an exceedingly high bounce. When we landed back on the trampoline it ripped from the high level (price piercing as described above). We bounced, but not to the previous height. In other words, we did not make a higher high as has been the case in this multi-year pattern. We did get a bounce up to the expected long term trend resistance, but we are also coming down in a much sharper decline that previous bounces off the lower trend line (i.e., momentum). With a weakened lower trend line and a hard downward trajectory, this long-term channel could be in jeopardy. Further concern is the volume spikes from our August high have been on selling.

The lower trend line support at around $156 also coincides with our short-term inverse head & shoulders pattern. A price support and bounce at $155 would be very bullish and re-establish the long term upward channel. A failure at that price would be a breach of the long term pattern and potentially dangerous for GLD, scaring traders out of their positions. We would have to look then for the next pattern in terms of time frame, which would be the wedge pattern as described on the daily chart. This wedge, with support around $152 would form a bullish pennant on the weekly chart and could break out up to the recent highs of last August.

Quick review of prices to watch in GLD:

·         Holding $155 -- longer term channel support and bullish inverted head and shoulders.

·         Failing $155 -- long-term channel broken, could get messy.

·         Holding $152  -- Continuation of bullish pennant, likely short term rally to previous highs.

Disclosure: At the time of writing, I have positions in GLL, a leveraged gold inverse ETF.

Follow my intraday market commentary and various other observances on 
Facebook and  Twitter  
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

If you liked this article you might like

SPECIAL REPORT: Should You Pay $1 for 60 Cents Worth of Bitcoin?

SPECIAL REPORT: Should You Pay $1 for 60 Cents Worth of Bitcoin?

3 Ways to Play the Falling U.S. Dollar

3 Ways to Play the Falling U.S. Dollar

This Is a 'Stalking' Market Right Now

This Is a 'Stalking' Market Right Now

Let's Try That Again ... Buy GLD Calls

Let's Try That Again ... Buy GLD Calls

Using Market Softness to Add to Stocks Incrementally

Using Market Softness to Add to Stocks Incrementally