Back on April 2nd I wrote a blog post titled, “Resist the Revenge Trade in Gold.” GLD was trading at $152.43 at the time, but is now trading at $134.95 as I write this. And the theme of the post was that even though gold had already been in a clear corrective pattern for months on end, gold bulls should still resist embracing the idea that it simply must be done going down now because it seems like it, or because the plain is plain wrong.
Specifically, I wrote:
As a quick update to this video from February on the precious metals, it now appears that the chart pattern in gold has morphed into a larger descending triangle. Within the context of a downtrend, bottom-pickers simply must respect the fact that these patterns tend to resolve lower, acting as continuation formations. Hence, revenge trading a vicious precious metals market in recent months is not the way to go for once-glorious bugs.
On the first chart below of the daily timeframe for the GLD ETF, you can see that Monday’s promising bounce led to yet another bull trap within an overall downtrend, as so often happens. Moreover, the light blue lines denote the larger descending triangle in play.
Going one step further, on the weekly chart, second below, you can see that gold could easily come down to $148 for a major test of that significant reference point dating back several years.
While gold bugs will argue that the best time to buy the metals in recent years has been when they looked the worst, technically speaking, that rationale amounts to sacrificing pieces in a chess match in favor of gaining a tactical advantage.
Eventually, you trap yourself…
Going forward, the precious metals and miners are most assuredly “oversold” by a variety of metrics, and could easily bounce imminently. Nonetheless, the durability of those bounces remains suspect. It is often said that the bigger the top there is, the bigger the drop. If that is the case, then gold has been topping since September 2011 and could just now be getting starting on a bearish breakaway gap lower down away from $148 GLD support.
It is still worth resisting the revenge trade in gold.