Charts of gold futures and the leading gold ETF are beginning to signal a short-term correction, which coincides neatly with historical seasonal weakness. MoneyShow's Tom Aspray shares the key levels to watch, including his preferred points for reentry on the next pullback.

The gold futures and leading gold ETF, the Spyder Gold Trust (GLD), dropped sharply Wednesday, but then closed up 1.5% for a new closing rally high on Thursday. For most of the summer, GLD traded in a fairly tight range, as the levels of support at $148.40 to $148.60 and resistance at $156.80 to $158.46 were well established.

Many gold investors had lost interest by the summer, as headlines like “Gold Loses Its Luster” were common. Fundamental factors like plunging demand from China and India were used as reasons why prices could drop even lower.

From a technical perspective, fundamentals always lag. This is especially true when it comes to commodity prices, which frequently rise or fall sharply in reaction to a fundamental report. It is those “quiet periods” that offer the best investing or trading opportunities.

Since July 27, GLD has closed up eight out of ten weeks, with GLD up almost 10% in just the past six weeks. During the summer there were few articles about gold, but now it is very hard to find anyone who is bearish, as the newly minted bulls try to out do each other with higher and higher upside forecasts.

Real investors or traders know that the more important question is not how high gold might go, but how much you have to risk in order establish and then stay with a position. Even if you think the December gold futures are going to reach $2,000 ($218 above Thursday’s close), the question you need to ask is, are you willing to risk $150 to make $200?

An objective technical appraisal can help those who are not long develop a sound buying strategy.

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Chart Analysis: The monthly chart of the Comex continuous gold contract shows that it is close to it’s highest close since August 2011 when prices were above the monthly Starc+ band.

  • Prices are currently well below the Starc+ band, which for October is at $1,897.

  • The upside target from the continuation pattern that has formed since the 2011 high is at $2,031.

  • The upper boundary of the trading channel (line a) is at $2,104 in October.

  • The monthly on-balance volume (OBV) has moved further above its WMA and is leading prices higher, as it is closer to its 2011 high than the prices.

  • Each new monthly high in prices has been confirmed by the OBV, which makes the major trend positive.

  • There is initial monthly support at $1,687, which was the September low.

    • The weekly chart of the Spyder Gold Trust (GLD) reveals that the weekly Starc+ band was tested three weeks ago. The triangle or flag formation (lines d and e) was completed at the start of September (a good buy point).

    • The measured target from the chart formation is in the $200 area, while the 127.2% Fibonacci retracement target is at $197.50.

    • The weekly Starc+ band is at $178.50 with the monthly Starc+ band at $183.70.

    • The weekly OBV finally broke out of its tight range (line f) to confirm the breakout in prices.

    • There is first weekly support at $166.30, with the rising 20-week EMA at $162.45.

    NEXT: A Look at GLD in Multiple Time Frames

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    The daily chart of the Spyder Gold Trust (GLD) shows that three times since late August (see blue arrows) prices have tested the daily Starc+ bands.

    • Each test was followed by either sideways action or a pullback.

    • On September 14, the high at $172.23 reached the Starc+ band. Eight days later (Wednesday), GLD had a low of $168.34.

    • This low was also very close to the rising 20-day EMA, which is now at $168.53.

    • The daily OBV gave a buy signal on August 20 (line 1) when it overcame resistance (line b).

    • The daily OBV did confirm the high on September 21, and pulled back to its rising WMA this week.

    • It is possible that the OBV will not confirm a new high for GLD in the next day or two, but a downside reversal would be required to indicate that a short-term top was in place.

    • The next resistance (line a) is in the $174 area, with further levels at $175.50.

    The hourly chart of the Spyder Gold Trust (GLD) shows a trading range (lines c and d), which if completed has upside targets in the $179 to $180 area.

    • There is initial support on the hourly chart at $171.50 and then $169.

    • For new longs, the tightest stop that seems reasonable would be under line 3, at $166.25.

    • The support at $159.60 (line 3) is a more important level of support for investors. This low is noted on the daily chart at point 2

    • The daily OBV formed a slight divergence at the recent highs, but is still well above its uptrend (line f).

    • It would take a drop below this week’s low at $168.34 to start a new downtrend.

    What it Means: For those considering new long positions in Spyder Gold Trust (GLD) the risk must clearly be considered. As Mark Hulbert noted this week, over the past 20 years October has been the worst month for gold prices.

    My reading of the sentiment and COT data suggests that the bullish sentiment on gold is reaching a level that normally coincides with a correction. In June, the sentiment was too bearish, in my view, and in my recent Trading Lesson, I went into a detailed review of my June buy recommendation for GLD and IAU.

    New highs are likely before a meaningful correction, so investors should take a patient approach. If GLD completes a short-term top in the $178 area, then a pullback to the $166 to $172 area would not be surprising.

    I would watch both the 20-week and 20-day EMA for guidance. Once the $177 level is exceeded, then initial buying could be done under $172 with further under $167.50, using a stop under $159.60. Of course, once a short-term top is completed, I will be updating you regularly.

    How to Profit: For traders, buying near Thursday’s close with a stop under $166.25 is a risk of $6 to make $8 if GLD forms a short-term top near $180. That is not favorable, in my opinion.

    For traders who are not already long, go 50% long at $170.40 and 50% at $168.44, with a stop at $164.76. Cancel if $174 is exceeded.

    Portfolio Update:
    Investors should also be 50% long the SPDR Gold Trust (GLD) at $152.42 and 50% long at $150.28. Use a stop now at $157.22. Traders should sell 25% at $178.12 or better.

    For investors should be long multiple positions in the iShares Gold Trust (IAU) from $15.68 to $15.42, with a stop at $15.72.