Click chart to enlargeStock charts typically get a certain amount above their moving average before falling back to reality. For gold, an overbought condition exists when the chart is 40% to 50% above its moving average. It doesn't matter what average you use. The percentages will change, but can still be used as a basis for comparison against each other.
The chart above shows that GLD (gold) is quickly reaching an overbought condition. How far could it go? Every 9 points represents another 10% rise above the moving average shown on the chart above. Therefore, a jump of 9 more points to a price of 125 would put GLD at 40% above its average. A jump of 18 points to a price of 134 would put GLD at 50% above its average. We're not saying that it won't go there. Of course, we don't know. But we do know that if it does reach those heights, particularly if it happens quickly, the chart is setting itself up for a dramatic return to the average.
The last two times GLD corrected, it fell roughly 25% to 30%. A repeat of this kind of correction would put GLD somewhere between $80 to $100 per share. There are few people out there at this point that don't already know that gold is the new hot investment. In fact, infomercials are popping up which are selling gold as the new investment vehicle of choice. The guy at the corner deli just bought some gold for the long term. If that doesn't signal a top in the making, we don't know what does.
In an ideal world, gold would quickly "blow off" to an incredible height (like $134) . From there, the downside risk would be too great to ignore, and people would start heading for the exits, leaving the guy at the corner deli holding the bag. This will surely be a fun chart to keep tabs on.
5 comments:
We're not recommending anybody short a chart trading above an uptrending moving average, but for the record, the inverse ETF's for Gold are:
DGZ = Gold Short
DZZ = Gold Double Short
Just as a gamble, we may just buy one of these if Gold blows off into the 130's. This is a risky trade, however, as traders who shorted high-flyers such as AMZN, YHOO, and EBAY painfully learned back in the day. Those stocks shot a few hundred points above all the lines... in a very short time.
As always, the trend is your friend. Shorting Gold is a high risk proposition, so don't jump in blindly.
Check out GLL, too. It is a double short gold ETF which may offer a better risk/reward ratio than DZZ.
Gary 2.0? :D
We'll start Gary 2.0 on Jan 1st, so it'll be easy to track his performance versus the fund managers.
Right now, we're in a great spot. With the markets current strength, we may just get the upside spike we've been looking for. We'd like nothing more at this point than to just get to an all-cash position. 10,600 looks likes it's within reach... maybe even 10,700.
IMO if this thing breaks out, it will go to 11000, but I prefer to use the SP500. My ultimate target of this "bull-run" is between 1200 and 1250 since the beginning of June.
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