Tuesday, December 13, 2005

Temporary Gold Top Remains Intact...

.....As many subscribers know, we have been bullish on both the Gold Trust ETF (GLD) and Gold Mining Index (GOX) throughout the past month. We netted a decent profit on GLD earlier this month and have been simply trailing stops higher to maximize gains on a handful of individual mining stocks. However, because each of our gold mining stocks hit their trailing stops yesterday, we wanted to give a heads-up to let subscribers know it may be time to take your profits on any gold or silver miners you have been holding.

A $10 per ounce overnight spike in the price of Spot Gold caused yesterday's regular trading session to begin with a 2.6% opening gap up in the GOX index and a 1.3% opening gap up in GLD. However, because the large gap in GLD occurred after it had already been rallying parabolically for several weeks, we were rather suspicious about its ability to maintain its opening gap. When you consider that GLD had closed higher for seven consecutive sessions, that made us even more doubtful that the gap would remain intact. Sure enough, traders sold into the strength of the gap and, by day's end, GLD had gained only 0.3% and finished near its intraday low. It also showed this type of price action on its highest volume day of the entire multi-week uptrend, which is bearish.

The GOX index similarly changed from a 2.6% opening gain to a 0.1% closing loss. When this type of intraday price action occurs after a stock or ETF has already been trending sharply for an extended period of time, it is known as an "exhaustion gap" and often marks a short-term top. For that reason, we took profits on all our open positions in the gold and silver mining stocks yesterday. Unless you intend to hold through at least a short-term correction, you may want to do the same. Looking at the chart of GLD below, notice yesterday's bearish reversal candle, as well as the huge volume spike to nearly four times its average daily volume. That large volume spike, combined with a reversal candle after a parabolic move, signal a likely short-term correction: