A few things to point out.  For one, gold didn’t really correct, but rather digested overbought conditions with more of a sideways move (actually head and shoulders pattern) and remains in a fairly tight range above the $130 level, so certainly gold has held its own up here and could be poised for a move to the next major resistance level up around the $150 level (another 10% or so from current levels).

Before a move like that can take place, gold will need to move out of a possible head and shoulders top formation which is still a possibility, but hasn’t been confirmed.  We’ll need a couple healthy moves down in gold for that to happen.  Adam Hewison of Ino.com is basically on the same page.  He just did a quick video highlighting the current action in gold and will conduct a webinar tomorrow.  Watch the video and sign up for the webinar by clicking on the video image below.

To round out this update on gold, I wanted to bring in the analysis of David Banister of MarketTrendForecast.com who uses Elliot Wave Theory.  Despite the variance in the tools used to analyst the current price action in gold, I think we can all agree… the price action in gold remains in a strong uptrend.  While there are vulnerabilities that could play out, the odds favor a move to the next level of resistance which I mentioned as around the $150 level for the GLD.  David sees resistance around the same area and targets a move in price of gold to the $1480 – $1525 level.

Get David’s full analysis here

I like to take a different approach and analyze it from a supply/demand angle using technical analysis.  Late last year was my last detailed analysis of gold and I predicted that a top in gold could come at the 1200 – 1300 level.

“What I see happening is some kind of climactic run in gold over the course of a few months with  gains of 20 – 30%.  That’s not a number pulled out of a hat, but based on previous runs from previous bases.  Notice how the farther up you get into the rally, the returns diminish as the base quality deteriorates.  Take a look at any big move in a stock and you’ll see this similar pattern.  It’s reasonable to assume that the returns from this breakout will be less than what we saw with the 2007 breakout.. so somewhere around 20 – 30%.  If the price of gold gets into that 1200 – 1300/oz area I’d be looking for some major topping action!  A climax run in gold over the next few months followed by massive selling on the part of institutions may be the end of a nearly 10 year bull run in gold.” 

I expected gold would reach that level a bit earlier than it has, but we’re darn close to 1300 which happens to the next big level of resistance for gold and an area where a correction will likely take place.  It’s much too soon to call $1300 a major top in gold and we could certainly take out $1300 at some point, but now is no time to be adding to gold and for many not a bad place to take some profits off the table.

Here’s a look at the current chart of the SPDR Gold ETF (GLD).  Two important aspects of the chart to point out.  One is the fact that GLD is overbought on the weekly  chart once again.  Take a look and see what happened to GLD the last four times we hit overbought on the weekly chart.  The first time it led to a major correction of 30% in 2008 and three minor corrections since.  We’re overbought again up around the 1300 level and it’s not out of the realm of possibility to see another 30% correction to test the bottom of the channel around 95 – 100.  The second important component of this chart is that the 130 level coincides with resistance at the top of the channel (purple line)

===> You can get a free daily technical analysis of GLD here

As always, I turn to the charts for some clues and Adam from Market Club gives us a video analysis as well.  While he uses some different indicators, we both arrive at about the same conclusion.. that gold is still undergoing a correction and the best strategy is to step aside until a new buy signal is provided. 

Below is a chart of the SPDR Gold Trust (GLD) which seeks to track the price of gold.  You’ll notice the parabolic move at the end of last, followed by a 20% correction and return to test the all time highs.  While gold held up at those lofty levels for nearly two months, it has since taken out support at the 2009 highs and is in the process of a correction. 

It’s anyone’s guess just how far gold will correct, but considering support at the 2009 high was taken out and the 50 day moving average (in blue) is now acting as resistance, it becomes a high probability that the next level of support will be tested.  That level is right around where the uptrend line off the March 09 low and the 200 day moving average converge around the 112 – 114 level.  I have no interest in gold stocks until that level is reached and even then, I’d be hesitant in getting aggressive.  I believe the odds are good for a much deeper correction, possibly to around the 100 level in GLD. 

If the GLD hits around the 113ish level, I’ll be looking to swing trade gold stocks for a few weeks with the idea it could run up and retest resistance around the 120 level, but I’d be taking profits should that move occur.  Given the parabolic rise of last year and what could be a big double top, gold needs to undergo a lengthy digestion of gains.  Over the next several months I’d rather be in nat gas and oil.

For another perspective on gold, Adam Hewison of Market Club discusses the fibonacci levels, MACD and their trade triangle indicators to determine where gold may be headed.  Click the chart to play the video.

With that, let’s jump into a couple charts of GLD which I think are quite revealing. 

The first one below is the shorter term chart showing two very bullish moves in September and then again here in October.  The first big move that really kicked off this rally in gold was the Sept 2nd breakout out of a bullish wedge formation.  After a short consolidation, it eventually broke out again, this time to a new all time high above that all important 100 level.  Note the big pick up in volume on the buy side which indicates quite a bit of conviction on the part of buyers.  I do think gold is a bit extended in the short term and probably needs to trade sideways or even pull back to 100 over the next few weeks.  That should be enough to clear the way for the next and possibly final leg up of this strong up trend. 

There are all kinds of estimates on how high gold will go.  It’s quite similar to what was happening in 2007 when the price of oil skyrocketed into the stratosphere.  My feeling is that there is certainly room to run in gold, but we are much closer to a big top in gold then another big run (like we saw over the past nine years).  In the chart below, I only show the move since 2005, but the big move in gold really began back in early 2001 when it was just $275/oz.  Despite what many of those selling gold products and trading services will tell you, it appears the move in gold is largely done. 

If you take a look at the quality of the base formations at the end of each leg up, what you’ll see is a significant increase in the depth and sloppiness of the base.  It reveals that an increasing number of people are watching and trading gold.  Just see how long it takes for a gold commercial to come up on any business channel!  When that happens, the mega move is largely over.  What I see happening is some kind of climactic run in gold over the course of a few months with  gains of 20 – 30%.  That’s not a number pulled out of a hat, but based on previous runs from previous bases.  Notice how the farther up you get into the rally, the returns diminish as the base quality deteriorates.  Take a look at any big move in a stock and you’ll see this similar pattern.  It’s reasonable to assume that the returns from this breakout will be less than what we saw with the 2007 breakout.. so somewhere around 20 – 30%.  If the price of gold gets into that 1200 – 1300/oz area I’d be looking for some major topping action!  A climax run in gold over the next few months followed by massive selling on the part of institutions may be the end of a nearly 10 year bull run in gold.   Get more gold analysis here

I first began trading DGP last summer and on June 16th, 2008 I told my premium members:

“My analysis is indicating that gold and silver is offering an initial entry point today by breaking out of downtrends and subsequently, bullish wedge formations.  This could be the beginning of another run in gold and silver over the next few months.  Entry at 21.16.”

::: >> (oh no, another gold commercial!)

One month later on July 15th, I locked in the 17% profit at 25.22 as DGP became very overbought. (see chart below)

Four months later it was time to put the gold trade back on at 13.59.  This time the trade was put on due to oversold conditions as DGP dropped from 22 to 12 in just one month.  I added a small position with the expectation that money would begin flowing back into gold… essentially I was bargain hunting which is something I don’t do very often.  I prefer the breakout/momentum plays but every so often extreme oversold conditions may offer a compelling trade.  This particular trade was sold about 6 weeks later at 18 after a 2nd move into overbought conditions.  Note the pull back to the 50 day moving average (in blue) a couple weeks later to the area around 15.  This would be have been an ideal place to re-enter the trade but I hopped on the gold train a bit late and initiated another trade at 18.95 on January 23rd following another breakout move above the December highs.  Gold continued to launch higher throughout February, testing resistance of the 1000/oz mark again (it last did so one year ago) and was way overbought after moving from 15 to over 23 in one month.  That provided the exit signal for me once again and exited for more gold profit on Feb 17th at 21.92

In the chart of Gold Double Long (ETN) below are the entries and exits over the past 9 months

I know, you might be thinking who cares about past trades. Show me the trade right now!  I’m getting there..   just remember that patterns repeat over and over so pay attention to consolidation breakouts as well as overbought and oversold conditions and not only will you do well trading gold but you’ll do well trading any stock or ETF.

Gold needed a rest and it pulled back to the next logical level of support where the upward trend line, the 50 day moving average and the 200 day moving average converge.  The area around 18.50 – 20 is a BIG area of support and I have been getting back into DGP around these levels.  We’re a bit overbought up here after gold soared following the additional Fed money moves so may need to spend more time sideways, but it created a breakout from the consolidation that began in February with the pull back over the past 3 days offering a nice place to scale back into gold.  It’s quite possible gold is setting up for a move to break through and hold above the $1000/oz barrier and if that happens we could enter a mania phase with BIG time profits.

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In our daily screens of stock charts exhibiting positive and negative MACD crossovers, The Correct Call recognized a trend too large to ignore. Our heads turned when we saw at least 25% of the upside candidates were Gold/Silver stocks and ETFs. As we have noted many times before, we are big believers in confirmation. When we see a disproportionate number of companies in the same sector all presenting the same "buy signal", we feel it is safe to say something is happening.

In these turbulent times it nice to find some water in the desert.

Investors worried about mounting losses can possibly stem the tide by adding Gold to their portfolio. According to a study titled "Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold" by Dirk G. Baur and Brian M. Lucey, gold is an "ideal venue to park money during periods of uncertainty." Their analysis found that in the US, Gold and stock returns are negatively correlated and that Gold acts as a hedge at all times. That means when stocks go down, Gold usually goes up.

That’s good news for investors.

All of the Gold/Silver stock & ETF charts we reviewed look this iShares COMEX Gold Trust (IAU). Each has roughly a 6 week narrow trading range with yesterday’s MACD breakout.

Conservative investors should buy IAU, streetTRACKS Gold Trust (GLD) or iShares Silver Trust (SLV).

More aggressive investors might consider owning individual stocks or DB Gold Double Long ETN (DGP). DGP’s objective is to give its owners twice the return of Gold’s price changes. That means if Gold moves up 5%, investors can expect see a return of 10%.

The precious metal stocks with charts pointing the way up include:

Barrick Gold Corp. (ABX) Apollo Gold Corp. (AGT) Pan American Silver Corp. (PAAS)

If we have made The Correct Call, we would expect investors to profit by 10% or more in the next 3-to-6 months owning Gold/Silver stocks and ETFs. (double that for DGP.)