Aside from the occasional intraday buy and sell opportunities, the GLD hasn't given me a high-probability buy-and-hold signal since late January 2011. In all fairness, two subsequent opportunities did present themselves in early July, but I missed one and opted to pass on the other. Frankly, I still don't understand the rationale behind gold's rise; history shows that the yellow metal is ONLY a hyperinflationary hedge. However, 'they' continue to tout it as a safe haven against inflation, deflation, and all sorts of 'flation', not to mention Euro woes. But that's beyond the scope of this post, so let me concentrate on the technical picture.
Chart 1 below depicts my wave interpretation of the price action that unfolded from November 2010 to January 2011. It's important that I re-open this closed door because this chart's predecessor actually conveyed quite a different picture.
Chart 1. A multi-month consolidation that began in November 2010 and ended in January 2011.
As observed below, my initial interpretation was that of an Elliott barrier triangle (aka. ascending triangle). However, this triangle became somewhat suspect once the lower trend line was broken, but it wasn't invalidated until endpoint C was ultimately breached.
Chart 2. The initial interpretation was that of a bullish triangle.
Eventually, the GLD managed to find a lasting bottom, and my trading and analysis system, HITS (High-Integrity Trade Signals), finally triggered a buy signal as shown on chart 2 above.
Enter December 2011, the year of the golden ratio (i.e., 0.618) for gold. Chart 3 below clearly shows how each wave managed to retrace 61.8% of the previous one. Clearly, the smartest trade in gold so far in 2011 is to reverse course upon a 61.8% retracement of a given up or down move on the daily chart. What does that say of gold? Only one thing: it's currently trendless, vacillating aimlessly in no man's land.
Chart 3. 2011: the year of the golden ratio for gold.
Now let's draw a trend line through endpoints A and C, and another through B and D. What do we get? Another triangular pattern (chart 4). Whether this triangle is the real McCoy (i.e., a bullish contracting triangle) or an ominous head fake remains to be seen. Until recently, gold had stood on two legs, but one of them was broken upon the market's realization that Europe won't be 'printing money' Bernanke style anytime soon. This leaves gold standing on only one leg: the anticipation of QE3. However, I doubt very much that the Fed will initiate a new round of quantitative easing at this stage, not only because the U.S economic data points have been steadily improving, but also because the Europeans appear to have pulled a rabbit out of their hat late last Thursday. In other words, this is not the time to fire the QE3 bazooka.
Chart 4. A triangular consolidation.
In conclusion, the wisest gold trade ahead of the Fed meeting is to stay the hell out as long as the GLD continues to meander inside no man's land. However, referring to chart 3, a break below $162.07 constitutes a short signal with a downside target of $140-$150. On the other hand, a break above $170.80 constitutes a buy signal with an upside potential of $200. With that being said, I can't imagine how the bullish case can possibly play out without a QE3 announcement.
Trade Well,
Peter