The SPDR Gold Trust (GLD) and the gold futures contract have posted impressive gains since November 2019 but have reached a major resistance zone, raising the odds for a reversal and pullback that has the potential to shake out the large supply of trend followers who have jumped into these securities in the past few months. Most importantly, the decline could be extensive and long lasting, perhaps piercing the 200-day exponential moving average (EMA) in the mid-$140s on GLD or around $1,500 on the futures contract.

Gold was engaged in a strong recovery wave well before the coronavirus pandemic struck in the first quarter, breaking out in June 2019 above a six-year trendline generated by the string of lower highs posted between 2013 and the first quarter of 2019. The rally attracted heavy momentum buying interest, lifting the yellow metal above $1,500 before settling near $1,450 at year end. Buyers returned at the start of 2020, with the uptick peaking above $1,700 on March 6, when world equity markets were plunging in response to quarantines and shutdowns.

A mid-March shakeout dumped more than 2,500 points before an equally vigorous bounce reached the rally high in mid-April, ahead of a breakout that stalled after the futures contract crossed the .786 Fibonacci retracement level of the 2011 into 2015 downtrend. Longer-term relative strength readings have been grinding sideways for the past month, while the gold fund is still trading a few points below its .786 retracement level, perhaps presaging a final buying spike before bears take control.

GLD Long-Term Chart (2007 – 2020)

Long-term chart showing the share price performance of the SPDR Gold Trust (GLD)

A 2007 breakout stalled at $100.44 in the second quarter of 2008, ahead of a downturn that accelerated during the economic collapse. The fund returned to the high at the end of 2009 and broke out once again, reaching an all-time high at $185.85 in September 2011. Price action then eased into a descending triangle that broke to the downside in 2013, setting off a major downtrend that finally bottomed out near $100 in December 2015.

A 2016 bounce carved a lower high just above $130, posting the third point in a descending trendline, ahead of three failed breakout attempts through February 2019. The fund and contract finally cleared resistance in June, entering a sustained uptrend that has posted three higher highs into the second quarter of 2020. Price action after the April 2020 breakout above the March high at $159 has settled into an ascending triangle with resistance at $165, with that level hanging tough as we near the end of May.

The monthly stochastic oscillator crossed into a long-term sell cycle from the overbought zone in November 2019 but eased quickly into a sideways pattern, indicating a delicate balance between bulls and bears. The March shakeout shifted the equation, triggering a futures uptick above the .786 retracement at $1,725, but the gold fund still hasn't reached the identical level, raising the odds that bulls will complete this chore in coming sessions.

GLD Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of the SPDR Gold Trust (GLD)

The on-balance volume (OBV) accumulation-distribution indicator topped out with price in 2011 and entered a long-term distribution phase, posting a five-year low in 2015. A successful 2017 test signaled a fresh accumulation phase and uptrend that accelerated in the fourth quarter of 2018. OBV reached the 2011 peak in February 2020 and broke out, adding to buying signals at the same time that world markets were collapsing. It is now situated near the March peak, maintaining the long-term bullish outlook.

The fund mounted resistance at the 200-day EMA in December 2018 and bounced at that level in May 2019 and March 2020. A reversal at or near the .786 Fibonacci retracement would favor another trip into that deep support level, suggesting a decline that could extend 20 to 25 points. In turn, the sell-off could mark a low-risk buying opportunity, ahead of an uptick that mounts resistance and continues into a long-awaited test of the all-time high posted almost nine years ago.

The Bottom Line

The gold fund and futures contract may reverse soon and drop into a test of deep support, shaking out weak-handed trend followers.

Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.