How Low Can The GLD Go?

By: Wayne Duggan

Two weeks ago, the SPDR Gold Trust (ETF) (NYSE: GLD) was one of the top-performing ETFs of 2016, up 24.0% year-to-date. However, since September 23, the GLD has logged nine consecutive daily losses and is down 6.3 percent.

What the heck is going on with gold? Here’s a look at the technical and fundamental pictures.

The GLD’s Technical Breakdown

There’s no question that the nine-day losing streak has done some technical damage to the GLD’s chart. Since the GLD surged to a two-year high of $131.15 back in July, the ETF spent the next three months forming a bearish descending triangle pattern. Support at $125 held once in July, once in August and once in September. All the while, the resistance line was sloping downward, producing successive lower peaks at $130.55, $129.08 and $128.20.

Finally, as is often the case following a descending triangle pattern, the GLD crashed through $125 support and so far hasn’t looked back. If the GLD doesn’t find technical support soon at its 200-day simple moving average ($119.84), is could be headed down to test its early-2016 support at $115.

A Fundamental Explanation?

According to Dennis Gartman, there seems to be little fundamental justification for the gold sell-off. In a recent newsletter, Gartman wrote that the dips looks more like liquidation than fundamentally driven selling.

“This view is further supported by the fact that the open interest in the COMEX futures has fallen by more than 4% this week, suggestive strongly of forced liquidation and throwing up of the hands,” Gartman wrote in a letter to clients.

To make matters worse, the Chinese gold market, which consumes roughly 40% of global gold, has been closed throughout the recent sell-off. Ironically, the drop in gold has occurred during China’s Golden Week holiday. Without Chinese dip-buyers providing support, the gold sell-off has continued mostly unchecked.

Levels to Watch

While there seems to be fundamental reasons to be optimistic that the gold sell-off is simply a short-term phenomenon, the dip has unquestionably caused technical damage to the GLD’s chart.

In the near-term, the GLD is tremendously oversold based on its 22.7 RSI. Traders should look for at least a short-term bounce off its 200-day SMA at around $119.

In the medium-term, the GLD will need to break back above $125 before its chart could start looking bullish again. If $119 doesn’t hold, traders should watch for $115 as the next possible buying opportunity.

Disclosure: the author holds no position in the stocks mentioned.

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