Charting Gold to the Gutter (GLD)

We’re going to give the goldphiles a slap on the Bruno this morning.

And while we’re at it, we’re going to offer them a stern warning against any further auto-emancipatory stick handling.

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Thank you, Steve.

Gold is as gold does, friends. And lately gold smells.

Do you want an investment that’s smelly?

 

What’s that you say? It won’t smell for long? One day it’ll be sweeter than a rose? Could be. But why not wait for that sweeter day to buy? Why hold on to an old smelly fish? Why keep it in the closet? Why let it pollute your premises and strangle your mind? Let it go. Be honest, and buy it back later for cheap.

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The psychology of a losing investment is one that’s hard to break. If your portfolio’s holdings have become a tenet of your religion, if you’re prepared to go to the rack, or the auto-da-fe or guillotine rather than commit HERESY! and sell your position for a loss, then you’re likely going to suffer further losses, depression AND financial death.

It’s also the case that the longer you hold your losing position, the more fervent you’ll become in your beliefs, the more committed you’ll be to your martyrdom, and the more apoplectically determined to prove your righteousness and the justice of your cause. Call it a form of madness. But it happens every day.

We Forget

 

This is a game, ladies and gentleman – a very high stakes one, to be sure. But we don’t hold any position – ever – that’s losing money for any longer than it takes for is to determine that it’s a loser. Behaving otherwise is a sign that we’re in the grip of what Freud called the ‘Death Instinct’. And who needs that?

Proper procedure is to bail out and look for another train. That’s the investment game. Call it what you want – chasing winners, bandwagon jumping – it doesn’t matter. In the uppity world of investment strategies it’s called a ‘trend following system’. Fancy that. ‘Trend following.’ Going with the flow. Something we did unintentionally and with pretty good efficiency when we were fifteen.

Ah, but back then we didn’t have religion, did we?

Look now at the SPDR Gold Trust ETF (NYSE:GLD) –

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According to the technicals, gold is at a break point.

• To begin, we’re coming off a 15% spike into mid-January that rose above all the stock’s moving averages and had the gold bulls excited for about a week (black circle).

• Following that, GLD fell below her long-term MA and began to cluster at the 274-day moving average (red circle). At that point, we still had hope for a rebound, but the thrill was gone.

• And today, we’re looking at a potential pull-the-trigger moment, with GLD hanging by a thread to the all-important 137 day moving average (in blue).

• As an aside, it should be noted that silver, as represented by the iShares Silver Trust ETF (NYSE:SLV), has already crossed below all her moving averages, and the miners, represented by the Market Vectors Gold Miners ETF (NYSE:GDX) are a mere 20 cents from doing the same. So from a moving average perspective, things look downright evil for the shiny metal.

• In addition, we have a technical formation boxed in black that bodes ill. It’s called an ‘island reversal’ formation, and it generally indicates a failed breakout. With gaps leading higher and then lower, the remaining island is testimony to the loneliness and coming despair of the bulls.

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• At no time during the bottoming period in November (in the 110-range), nor again during the burst higher through the New Year, did we see any change in average daily volumes (green box). That’s significant. A true bottom, or trend reversal higher, should have been accompanied by a surge in trade activity. This did not.

• That, together with an RSI submerging below its waterline and a MACD reading that’s heading toward the same (black boxes at bottom), indicate to us that it’s time to abandon all pretense and sell this sucker like a fish.

The Broader View

 

Just to show we’re not joking, we’re going to offer you a weekly chart of GLD. We do it for the sake of your portfolio and your general investment edification. And to rub it in a little.

Take a look –

gld292

The salient features on the weekly are as follows –

1. In the last six weeks we’ve seen the moving averages rolling lower (red circles) and price in now on the cusp of dropping below them all (at blue arrow).

2. GLD spent nearly three months there (below all her MAs) last Fall, so it’s not a precedent setting event. But their return to ‘bottomless’ territory – as we like to call it – is not a warm and fuzzy development for gold holders. It more likely portends a steep drop toward gold’s ultimate resting place in the sub-1000 deep blue sea.


But will it happen?

 

Hard to say definitively, but with RSI curling below its waterline and MACD looking ready to dive again (black boxes), we’re of the opinion that there’s probably less than a week of play left before a sincere move toward the valley of the shadow of death ensues.

So what are we doing?

Well, we have an open trade on GLD that we think it wise to close out here 1) because it’s produced an extraordinary windfall for us, and 2) because the battle between bulls and bears at this climactic moment could produce some sideways movement for a few weeks that whittle away at our gains.

So we’re selling.

The trade was opened three weeks ago in a letter called Walking Through the Trade, and it recommended selling a credit spread against GLD and buying a PUT with the proceeds. The trade cost us $0.82 net to initiate and today our long GLD April 116 PUTs are selling for $2.66.

That’s $1.84 pure profit on $0.82 laid out – if our CALL spread expires worthless.

And that’s exactly what we’re expecting.

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Wall Street Elite recommends you close your long GLD April 116 PUTs for $2.66 and leave the CALLs to wither.

 

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Wall Street Elite recommends you close your long GLD April 116 PUTs for $2.66 and leave the CALLs to wither.

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With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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