Stay Short in SPDR Gold Shares ETF
Gold is rare and people love it, so its price should always go up, right? But SPDR Gold Shares (NYSEARCA:GLD) has had an extended run that should slowly start to become less intense. So today’s trade is GLD stock. The argument is not that it rose too much, because it still trails the S&P 500 year-to-date. The problem is that with the steepness of its wedge, its chart is vulnerable to dips.
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This is nothing personal against the shiny metal, but nothing goes up in a straight line forever — although the recent run in GLD, iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) and iShares Silver Trust (NYSEARCA:SLV) was insane. Global investors chased those three up partly as a safe haven trade from geopolitical risk, and also because of the popular TINA acronym.
Consensus is that there “there is no alternative” to buying U.S. Treasurys when global bonds yield negative rates. Not many are willing to buy investment vehicles that advertise guaranteed losses. So they buy U.S. bonds, gold and silver instead. This means GLD came along for the ride.
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There is Danger in Those Golden GLD Charts.
There is no way I can quantify the value of gold. The stuff is in high demand and people love it. The only reason it has any value is because we say so. Furthermore, it is hard to extract and getting even rarer. Clearly the price should go up indefinitely.
But the modern Wall Street is more predictable than in the past. These days machines do most of the trading, so the chart technicals have a lot of say. As bullish as gold story’s is, GLD stock should correct. I am not calling for a complete collapse, but there are levels that need revisiting before any rally can proceed.
During the 2011 rally, experts called for gold prices to hit $2,200 per ounce. That marked the top and started a four-year correction. Furthermore, this rally merely brings gold to about the 50% retracement level of that correction. While I don’t want to predict similar doom here, I expect GLD stock to revisit lower levels to build a better chart.
Before you label me a perma-bear, I assure you that I prefer trading upside potential as it makes for happier and more positive attitudes. But the dip would give GLD the chance to build a better base for what ever future target it wants.
A spike straight up leaves weak hands in control of GLD. So then at the sign of any trouble, the bulls become gutless and panic out of their positions. That is when trap doors open — and the exit doors are never large enough to accommodate an orderly exit.
In September, GLD stock corrected about 5% and is now is trying to shake it off. The short paid, but it is not yet clear that there is reason to stop shorting it here. If you are already short GLD, you can stay in it with proper stops.
The Bottom Line on GLD
From here, I expect GLD to head lower because it needs to retest $139 and $136 per share. This next statement will probably anger the gold bulls, but GLD stock should eventually fill the gap near $128 per share.
In early June, the gold trade caught fire near $127. GLD rallied 16% from there with no retracement. Then September’s dip came. There will be a fight between buyers and sellers near $140 for the control of the price action, so I expect a stall there.
Next week is important for GLD. The Federal Reserve will make its decision on rates. If the Fed doesn’t disappoint Wall Street then the markets will make new highs and it will be hard for gold bulls to maintain the rally. Conversely, if Fed Chairman Jerome Powell causes another equity market dip, then shorting GLD stock will be difficult.
Since I can’t control the headlines, I revert to charts to make decisions. The SPDR Gold Shares chart suggests that staying short here until the $140-zone fight ends is the right thing to do.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
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