This Might Be a Golden Opportunity to Short Gold

Gold prices have benefited from the Black August performance of the S&P, Dow
Jones and Nasdaq. Yesterday, gold reached a new all-time high. With no overhead
resistance and only the sky being the limit, its difficult to forecast a new
price target or identify resistance. One thing though is obvious. Everyone loves
gold. Gold is almost as beloved as silver was in late April. The trading volume
for popular gold ETFs like the SPDR Gold Shares (NYSE: GLD ) and iShares Gold
Trust (NYSE: IAU ) has gone through the roof. It is no wonder that over 90% of
gold futures traders are bullish the metal. The interesting thing is that the
bullishness is limited to gold prices and hasnt really spilled over to gold
mining stocks. Year-to-date the SPDR Gold Shares are up 25% while the Market
Vectors Gold Miners ETF (NYSE: GDX ) is down 3%. Thats not healthy. An Unhealthy
Non-Confirmation I wanted to see just how big the discrepancy between gold
prices and gold stocks really was, so I prepared a little chart. The chart
which shows the spread between GLD and GDX, along with my thoughts is pasted
below: Everyones in love with gold, which stirs up my contrarian juices. Gold
remains above the upper trend line and momentum is strong. Theres no need to
step in front of this freight train. But gold is extremely stretched and trading
significantly above its upper Bollinger Band. Any break in the armor could lead
to a scary and unexpected decline. The chart plots the SPDR Gold Trust (GLD)
against Gold Miners ETF (GDX). Shares of gold mining stocks have been stale
while gold prices are on fire (the red line shows the spread between GLD and
GDX). This doesnt mean prices cant go any higher but there sure is an unhealthy
non-confirmation. Even though gold is the logical fear trade, price action is
also dictated by liquidity. At some point investors will have to sell holdings
to pay off debt or answer margin calls. Commonly the most profitable asset is
sold first. Gold has been the best performing asset for decades and a liquidity
crunch could produce sellers en masse. Since Wednesday nights update, gold
prices have dropped 80 points, which isnt a huge deal at least not yet. Trend
Line Support More importantly, gold prices are trading above a trend line that
goes back all the way to 2006. As long as prices remain above this trend line,
its dangerous to bet against rising prices. But once prices drop below, its
worth taking a shot at shorting the metal with a stop-loss slightly above the
trend line. Another indicator that helps identify a possible breaking point of a
momentum-based up trend is percentR, a measure of relative strength. Using
percentR, we were able to capture silvers (NYSE: SLV ) drop from 43 to 34 at the
beginning of May. After todays decline gold prices have arrived at a crucial
juncture, at least based on percentR trading guideline. In addition, gold is
close to the upper trend line. Odds are that gold will tell us soon what it
intends to do.