Technically speaking, I should have titled this post GLD: The Moment of Truth. Even though GLD is a good proxy for gold, I can thing of quite a few scenarios (not all of them conspiracy theories) whereby GLD and gold stop being perfectly correlated. But for the sake of argument and acknowledging that GLD's stated goal is to mimic the price of gold, let's assume GLD and gold are indeed perfectly correlated and let's do the technical analysis based on GLD.
First the bad news. As we can see in the first chart, the GLD weekly (click to enlarge), GLD might have completed a double-top below 100. Not only that but it has broken its 20-week simple moving average and both the 14-week RSI and the slow stochastic indicator are unequivocally pointing down. That's for the technicals.
The sentiment background is quite negative also, with a consensus crystallizing these days that the worst of the financial crisis is over, the world as we know it is not coming to an end and a hyperinflationary dystopic future is not in the cards just yet. All of these reasons and/or excuses to buy gold at any price have therefore, if not completely disappeared, at least receded to darker corners inside the collective subconscious of the relevant market players.
So, undoubtedly, we are in a downtrend within a larger gold bull market. What needs to be elucidated is how damaging this downtrend is and where/when does it signal the end of the gold bull and not merely a corrective move.
That's where the second chart comes in, the good news part of my argument. One of my all-time favorite type of charts is the relative or ratio chart. There is no rocket science involved, yet there is no better type of chart to clarify, simplify and deepen any technical analysis of any kind of security. The chart (click to enlarge) simply shows us the daily ratio of GLD over SPY, the S&P 500 ETF and it is clear that gold has been outperforming the index spectacularly for quite a few years now. Even with the current bout of relative gold weakness, the trend of GLD relative to SPY is still steeply up for now.
That long-term uptrend would be seriously damaged if and only if two key supports are decisively breached. One is last January's low at 78.87 and the other and most important one is around 70, the 2006 high that also, not coincidentally, turned out to be the low for the Fall of 2008 panic liquidation.
Let's keep the Hawk-Eye on these two levels.
