After an uneventful 2015 and a rough start in the new year, the stock market may not seem very appealing to investors and trend traders lately, but stay positive because there’s always an opportunity for astute traders who aren’t afraid to look in the market’s nooks and crannies.
Right now, there is an excellent, stealth opportunity in gold and this article will clearly show you why it's is shaping up to be a great place to park some cash in 2016, especially if you’re looking for a trade or investment with solid return potential and minimal stock market correlation/risk.
For simplicity sake, we’ll discuss and look at charts of the actual spot gold futures, but will share the simple ETF investing opportunities at the end of this post.
Gold Starts To Shine Again
After clearing the highs of a two-month long trading range in the 1050 to 1085 area, spot gold futures broke out above intermediate-term resistance to a new 3-month high in late January.
This bullish momentum caught our attention, which prompted us to buy SPDR Gold Trust (N:GLD) in the Wagner Daily newsletter on January 27 (more on the buy entry in a bit).
Take a look at the daily chart of gold futures below, then follow the price action with the concise technical commentary that follows:
The first bullish signal in gold was the breakout above range highs (around 1,085) on January 6, which coincided with a close above the 50-day moving average (blue line) for the first time in several weeks. Volume started picking up as well, confirming increasing demand.
The price action of gold also set a higher closing high, taking out the previous high of 1084 (from December 4).
A few days later (January 14), gold pulled back to the 1070 area and undercut the 50-day MA, but the shakeout was short-lived and the shiny commodity recovered back above that key indicator of intermediate-term trend (another bullish sign).
After holding above the rising 20-day exponential moving average, the price action consolidated in a tight range January 21 & 22, setting up the 1110 area as a breakout pivot.
As the price action tightened up, notice that the 50-day MA started to trend higher as well (another bullish sign), after the 20-day EMA crossed above the 50-day MA.
Breakout Buy Entry
On January 26, gold triggered a buy signal for us, as it cleared the prior swing high on the biggest volume it has seen since it started basing out.
One day later, we notified subscribers we were purchasing SPDR Gold Trust, a popular gold ETF, in our trading newsletter because we were looking for momentum to continue building over the next several weeks.
But as always, we did not buy based solely on the short-term daily chart. Rather, we used multiple time frames to look for confirmation that gold is head in the right direction.
Upon looking at the longer-term charts, we spotted a multi-year trend reversal shaping up on the monthly chart of gold futures. Check it out:
The monthly chart above shows gold tightening up into a descending wedge like pattern throughout much of 2015, followed by a downtrend line breakout and move above the 10-month moving average (similar to 200-day MA) this month.
When we bought the gold ETF on January 27, GLD had not yet broken out above that long-term downtrend line.
However, we were comfortable with an early entry because it gave us the chance to more easily sit through the volatility that typically occurs when a stock/ETF breaks through a major level of price resistance (such as a multi-year downtrend line).
The Gold Plan
Now that we have established a position in a Gold ETF, we are looking for GLD to trend higher in the short-term, while holding above near-term support of its rising 20-day EMA.
Then, if the price action is able to trend higher for a few more weeks, we expect intermediate-term trend to really pick up bullish momentum and send gold substantially higher.
In that case, the first pullback to the rising 50-day moving average should offer another low-risk entry point for those who prefer a little more price confirmation before taking advantage of this stealth trade setup.
The easiest way to trade gold is to buy one of several different gold ETFs. Depending on your trading/investment objectives, you can choose from an ETF that simply moves in parity with spot gold futures (GLD) or step up the volatility (and risk) through buying one of the leveraged gold ETFs instead (O:UGLD) moves at roughly 300% the percentage change of spot gold).