first majestic silver

Outlook for GLD

Technical Analyst & Editor
March 10, 2006

It is not wise to write about gold's correction. It seems folks prefer to read those four and five digit gold price predictions, therefore, if you belong to the "to da moon" club, read no further.

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".

Summary

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

Jack Chan is the editor of Simply Profits, established in 2006. Chan bought his first mining stock, Hoko Exploration, in 1979, and has been active in the markets for the past 37 years. Technical analysis has helped him filter out the noise and focus on the when, and leave the why to the fundamental analysts. His proprietary trading models have enabled him to identify the NASDAQ top in 2000, the new gold bull market in 2001, the stock market top in 2007, and the US dollar bottom in 2011.


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