How Long Can GLD Remain Overbought?

September 30, 2010

According to this technical indicator, GLD is overbought—and primed for a price drop.


Six trading days and counting. That's how long the SPDRs Gold Shares Trust (NYSE Arca: GLD) has been overbought.

Not that this condition hasn't cropped up before. Since its debut in 2004, trust shares have tipped the needle into the overbought red zone 18 times. (Make that 19, counting the current market.)

So, what does "overbought" mean?

This condition—usually a precedent to a price pullback—arises when a security's (or commodity's) cost rises to such a degree that an oscillator moves above its upper band.

"Okay," you say, "So what's an oscillator?"

An oscillator is a momentum indicator used to identify short-term price extremes. For example, the Relative Strength Index (RSI) is one such oscillator that compares the magnitude of a security's recent gains to the magnitude of its recent losses, then converts the result into a number ranging from 0 to 100.


SPDR Gold Trust (GLD) Performance


When an RSI reads 70 or above, that indicates a security is "overbought"; with an RSI at 30 or below, a security would be considered "oversold."

Notice that the price action of the SPDR Gold Trust—like gold itself—has pushed its RSI above 70 for the past six trading days.

Now, oscillators like the RSI tend to be poor trade triggers in markets that are strongly trending. They can show a market as either overbought or oversold, even while it continues to trend. But for GLD—and bullion—there's a strong link between an oversold RSI and near-term sell-offs.

Here's a compendium of RSI-indicated overbought periods for the SPDR Gold Trust and the price consequence one week later:

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