This week gold junkies learned a lesson of the inevitable. Trends that turn parabolic are simply unsustainable. Nothing, not even gold, can defy gravity indefinitely. While picking the top of a steep uptrend is frustratingly difficult, it is not difficult to anticipate the correction will be steep once it finally arrives. Such was the case with the crazy run in silver once it finally caved in April and such has been the case with countless other parabolic runs. That said, I suspect the current retracement in GLD will be much less severe than silver’s correction. If nothing else these recent developments illustrate the importance of using a stop loss when you’re chasing a commodity as overextended as GLD was before the correction.
So what’s next for GLD? As is customary for charting enthusiasts, we can look to the past to get a better idea of what the future may hold. How has GLD reacted after other high volume corrections? As shown in the chart below, the last three corrections on elevated volume signaled a shift in momentum. Rather than bouncing back strong and surging quickly to new highs, GLD entered a consolidation phase. Given the gargantuan gains GLD has captured over the past month, it’s easy to argue the need for some digestion. While we may see a minor bounce back over the coming days I would be very surprised if we surge to new highs anytime soon. As we’ve seen in the past it usually takes time to heal a high volume correction.