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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
It’s hard to think of a commodity that attracts as much attention and emotion as gold.
For some, gold represents the hope of a big move.
And for others gold is seen as a store of value… and a potential hedge against inflation.
But as you can see in the SPDR Gold Shares ETF (GLD) chart below, neither of these beliefs come true very often.
While inflation was starting to run hot last year, gold barely budged. Those who bought gold expecting a big rally likely gave up their position out of frustration.
Instead, the smart way to trade gold is to ignore your emotions and follow the chart. Remember, as traders we aim to capture short and sharp moves.
We discussed this last year on November 24 and November 25, when we analysed two successful GLD trades we did with my trading service, The Opportunistic Trader. All up, we generated a combined 210% return in just 18 days.
GLD is starting to show promising signs once again.
Let’s look at the chart…
SPDR Gold Shares ETF (GLD)
Source: eSignal
You can see that before February, GLD traded in a sideways range…
The 50-day moving average (MA – blue line) traded mainly flat, with the 10-day MA (red line) criss-crossing it a couple of times.
However, in February that all changed.
The 10-day MA began to break higher and further above the 50-day MA – a bullish signal.
That strong move higher ended with GLD peaking on March 8.
This type of move often lures new buyers into the market. They see the price gapping strongly at ‘A’, and just can’t resist trying to get in on the move.
However, these moves can also lead to immense frustration when the buying momentum suddenly evaporates…
On the lower half of the chart, you can see that the Relative Strength Index (RSI) was already approaching overbought conditions. This happens when the RSI is on or above the upper grey line.
GLD’s peak coincided with the RSI reversing strongly from overbought territory. After falling, the RSI began tracking along support up until recently.
So, what can we expect from here?
Well, let’s take another look at the chart…
SPDR Gold Shares ETF (GLD)
Source: eSignal
The key takeaway from the RSI, is that this support has held. You can see it tested support multiple times before breaking higher around a week ago.
That action has also seen the GLD share price move higher over the past week.
One way I’m monitoring the strength of the current up move is through our two MAs. After converging through March, I’ll now be watching for the 10-day MA to move higher and further away from the 50-day MA.
That setup could provide an opportunity for a long trade.
Beyond this immediate move, there’s another trade brewing if the RSI moves into overbought territory.
If the RSI inverts from above the overbought line, there could be a potential setup for a short trade.
Ultimately, this means we can profit both long and short in the span of a few weeks… Just like we did recently with those two trades in The Opportunistic Trader.
But remember to not let your emotions carry you away – especially when it comes to trading gold. Instead, follow the key technical indicators like the RSI to start putting large profits into your account.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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