Managing Editor’s Note: Jeff Brown – a longtime tech investor – is predicting an “AI crash.” And given his bullish attitude toward AI thus far, you might not expect what’s coming…
Jeff says disruptive breakthroughs like AI create a lot of winners… and losers. And he wants you to be prepared when many AI stocks – including some big names – tumble in the next few months.
That’s why he’s holding a special event on Wednesday, November 20, at 8 p.m. ET to tell you about what’s ahead… and his strategy for playing the crash.
If you haven’t yet, there’s still some time to add your name to his guest list. You can do so right here with one click.
One commodity that has enjoyed a great run this past year is gold.
From its October 2023 low to its recent peak, the SPDR Gold Shares ETF (GLD) rallied 53%.
The gold pundits were tripping over themselves as they predicted much higher prices ahead.
But far-fetched gold targets rarely play out.
And gold has a habit of reversing sharply, leading to much disappointment – just like what has happened over the past couple of weeks.
Yet GLD has recently been tracking around 8% below its last peak.
So today, I want to see what’s in store from here…
Inverse to the Dollar
The chart of GLD below shows its huge uptrend that carried over from last year.
You can see that long-term uptrend in the 50-day Moving Average (blue line). The 10-day MA (red line) has predominantly traded above it.
Also, notice that the Relative Strength Index (RSI), a momentum indicator, has bullishly tracked in the upper half of its band throughout the rally (above the green line)…
SPDR Gold Shares ETF (GLD)
Source: e-Signal
Yet even before Trump’s victory, GLD had already reversed…
That coincided with the RSI forming a double peak in overbought territory before dipping sharply.
GLD gapped lower as Trump’s victory became clear. A rebound failed to take hold, and GLD slumped further.
One of the causes of that fall was the massive rebound in the U.S. dollar.
The U.S. Dollar Index (DXY) gauges the USD against a basket of major currencies. And it has rallied 6.5% since late October.
A strong U.S. dollar often leads to a weaker gold price… and vice versa.
Another factor behind the strengthening USD (and weaker gold price) is inflation. Trump’s proposed policies will likely lead to higher inflation.
In particular, his plans to impose tariffs on imports will drive up prices. Plus, proposed tax cuts could dial up demand, adding further pressure.
This will give the Fed less room to move with its interest rate-cutting cycle. That could further strengthen the USD.
But the move in USD looks overstretched and vulnerable to a correction. And if the USD reverses lower, it could lead to a rebound in GLD.
What’s more, gold is also an inflation hedge.
So investors will start rotating into GLD if inflation starts making a comeback.
This would add further tailwinds to a recovery in GLD.
So after GLD’s drop, how should investors play it from here?
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Working the Odds
When a stock is falling like this, it can be tempting to try to pick the low. But that is a low-probability way to trade.
You buy in and the stock often takes another leg down (often referred to as “catching knives”).
However, that’s where the RSI provides a clue…
As the chart shows, the RSI has broken down through support (green line) on the recent move lower. Now it is tracking close to the oversold level (orange circle).
In fact, the RSI is now the most oversold it has been in over a year. That means we could be close to a rebound.
Some traders like to enter new positions using oversold signals.
Another way is to look for confirmation of a rebound, such as a clear reversal higher in momentum… For example, if you see the RSI form a ‘V’ and rebound from oversold territory. Then you could buy in on the back of that upswing in momentum.
Waiting for setups like this doesn’t guarantee we’re always going to get it right. Sometimes there are false breakout moves.
But in general, signals like these do put the odds much more in your favor.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict