In a bull market, price accelerates, consolidates, then accelerates again. The consolidations could be just a mild pullback, or sometimes a deep correction. What determines whether it is just a pullback or deeper correction depends on two things: support and resistance. When supply overwhelms demand, we have resistance. When demand overwhelms supply, we have support. Simple volume analysis provides excellent feedback on this tuck of war between supply and demand, therefore, support and resistance.
GLD mirrors the movement of the bullion, therefore, gaps occur often due to overnight price pressure from overseas and from the futures market.
On 2/07, GLD gapped down on heavy volume, obviously supply was in control. After finding support at the 50ema, it rallied and filled the gap on 3/02. But the volume shrunk by more than 50% from the down gap, and when a gap is filled at lower volume, supply is in control again and price is firmly rejected. To put it simply, when a gap is filled at lower volume, it often becomes support or resistance, in this case, resistance.
Then on 3/08, GLD gapped down once again due to heavy selling in the futures market overnite. Today, gap was filled at about half the volume, therefore, today's high should become resistance. Since we are rejected by resistance again, price will naturally search for next level of support…..
Gaps galore! In charting, gaps are the magnets and price is the steel. Here are the good news and bad news: Bad news first: there are three lower gaps which are begging to be filled. Now the good news: all these three gaps were on above average volume, therefore, if selling continues but volume dries up, there is plenty of support below. But if volume increases, and these gaps are filled at higher volume, we need to go deep…..
Ouch, that is deep.
No way, not down there! Yes, folks, the "Katrina gap".
The gold bulls out there must be having a fit. Look, I'm just telling you what I see. If the two down gaps occurred in low volume and left unfilled, that would be very bullish. But because they were filled and now have become resistance, there is no need to revisit them any time soon, especially with so many gaps below current price levels. For the long term well being of the gold bull, it is in our best interests that these lower gaps get taken care of sooner the better. Because the further prices rally away from these gaps, the deeper and more painful the eventual correction will be. That Katrina gap is obviously a "breakaway gap" and may not be filled, ever. Well, not until the next major gold bear market anyways, in the year 2525. According to most gold analysts, $600 gold is a gimme for 2006. Folks, there is no "gimmes" in trading. One baby step at a time.
Jack Chan at www.traderscorporation.com
10 March 2006