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On April 14, we wrote a blog post titled How To Profit From The Break Of 6-Year Uptrend in Gold. At that time, we said of SPDR Gold Trust ($GLD) that a bounce into new resistance of its prior support level (around the $150 area) would provide an ideal, low-risk short selling entry point.
But since the gold ETF plunged nearly 20% over just a two-day period (April 12 and 15), the odds of a quick bounce all the way back to the breakdown level became minimal. Nevertheless, two weeks after the meltdown, $GLD is now technically setting up for a secondary short selling entry point, based on momentum, that is also ideal.
Since its April 15 low, $GLD has been bouncing from near-term, oversold conditions. Last Friday, the gold ETF bumped into and “overcut” resistance of its 20-day exponential moving average on an intraday basis. However, by the closing bell, $GLD had fallen back down below its 20-day EMA and closed near its low of the day. This is shown on the daily chart below:
When looking to profit from a stock or ETF that breaks down below support, then subsequently bounces into resistance, we prefer to avoid entering a new short position while the equity is still moving higher. Rather, after the breakdown, we wait for the first day that the equity closes substantially lower following a rally into resistance (learn more about our short selling strategy).
In the case of $GLD, last Friday’s probe above the 20-day EMA and formation of a bearish reversal candlestick is especially attractive because it followed a strong move higher that occurred on April 25 (bulls are forced to sell). As such, $GLD now presents us with a low-risk entry point on the short side only ifthe price falls below the April 26 low (all bets are off for short selling entry until that happens).
With this swing trade setup, we want to clarify that we are NOT necessarily expecting $GLD to make another leg lower within its current downtrend. Rather, we are merely anticipating at least a retest of the April 15 low (such as an “undercut”) before $GLD stabilizes and tries to make any type of significant move higher. As such, note that our projected holding period of this momentum trade setup is expected to be shorter-term than our typical ETF swing trade.
Also, note that our actual trade setup on today’s official “watchlist” is actually to buy the inversely correlated DB Gold Double Short ETN ($DZZ), rather than selling short $GLD. We do this because many Wagner Daily subscribers have non-marginable cash accounts, such as an IRA accounts, that prohibit short selling of any kind. But through buying a “short ETF” instead, these traders can still benefit from the downside movement of certain market sectors. Still, we are basing our entry and exit points on the actual chart of $GLD, rather than $DZZ, to ensure the most accurate tracking to the price of spot gold. Subscribers to our ETF and stock picks newsletter should note our preset and exact trigger, stop, and target prices for the $DZZ momentum trading setup in today’s report.
On a separate note, here is a brief update on the open stock and ETF positions presently in our model swing trading portfolio: We sold a partial position of Celldex Therapeutics ($CLDX) for an 18% gain on April 25, but remain long about half the original shares (more on our $CLDX entry here). LinkedIn ($LNKD) is currently 7.8% above our April 9 entry point and we continue to ride the profit. The other three individual stocks in our model portfolio are each slightly higher than their recent entry points, and we remain long.
On the ETF side, our existing long position in Semiconductor HOLDR ($SMH) has been following through to the upside nicely. It held last week’s breakout to a new 52-week high and its currently up about 3% from our average entry price. US Natural Gas Fund ($UNG), also showing an unrealized gain going into today, formed a bullish “hammer” candlestick after finding support at its 20-day EMA last Friday. It looks well positioned for further gains in the coming week. On today’s watchlist, subscribing members of our technical stock pickingnewsletter should also note the trade details for three additional swing trade setups (2 stock picks and 1 ETF pick).
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We think you may enjoy these posts:
- How We Gained 9% Selling Short Gold Into The Bounce – Trading Strategy
- Profit From Short-Term Momentum Of Trend Reversal In Natural Gas ETF ($UNG)
- An Unusual and Quick Momentum-Based ETF Swing Trade Setup ($VXZ)
- How We Gained 15% On A Momentum Swing Trade In $CLDX Stock
FAQs
Gold traditionally has an inverse relationship with stocks. Investors swarm to the precious metal during times of turbulence as a sure-shot way to protect their wealth, while equities are the preferred bet when optimism runs high over the trajectory of economic growth and corporate profits.
What are the advantages of momentum strategy? ›
Benefits:
- Momentum trading can be highly profitable for traders who can correctly identify strong trends and market movements.
- This strategy can be used for short-term trading and can quickly generate profits if executed correctly.
Momentum trading vs swing trading
Whereas momentum strategies focus on following the current trends of an asset, swing trading takes a different approach to this. Instead, swing traders trade within ranges and tend to focus on buying and selling at support and resistance levels.
Why is gold so strong? ›
Gold, the BofA analysts said, has been boosted by a confluence of factors including geopolitical risk and strong demand from central banks, and could get an even bigger boost from interest rate cuts later this year. China has shown a particular appetite for gold recently.
Why is gold price dropping? ›
Gold futures slumped 1.8% to $2,371.4 a troy ounce, as diminishing geopolitical tensions in the Middle East hit safe-haven demand.
Why is gold negatively correlated with USD? ›
Because gold is generally dollar-denominated, a stronger U.S. dollar tends to drive gold prices lower, and vice versa. Real and expected inflation rates also affect the price of the metal.
What are the problems with momentum trading? ›
Risks of momentum trading include moving into a position too early, closing out too late, and getting distracted and missing key trends and technical deviations.
What are the disadvantages of momentum trading? ›
Some of the potential risks associated with this strategy include: Reversals in the market: Since trends are not permanent, there is a constant risk that the market might change direction, resulting in potential losses for momentum investors.
What are the advantages and disadvantages of momentum? ›
Advantage: Momentum strategies exploit persisting trends. Disadvantage: Momentum strategies struggle to adjust to rapid changes in market conditions. Advantages: Decreases momentum crashes and leads to higher risk-adjusted returns. Disadvantages: No enhanced momentum strategy emerges as consistently superior.
What is the best indicator for momentum trading? ›
Moving Average Convergence Divergence (MACD)
Often regarded as the best momentum indicator, MACD is a trend-following indicator. It represents the relationship between 2 moving averages of a financial instrument's price.
The bottom line on momentum trading is that it is a higher-risk way to put money to work in the stock market. And it's certainly a form of trading, not investing. Momentum trading can be a good way to make money when things work out, but it can quickly result in big losses if things go the other way.
What is the most successful swing trading strategy? ›
As far as patterns are concerned, the ascending and descending triangles are considered to be the best. The top swing trading strategies are Fibonacci Retracement, Trend Trading, Reversal Trading, Breakout Strategy and Simple Moving Averages.
What will gold be worth in 5 years? ›
Two Jakarta-based commodity analysts forecast that the price of gold could reach as high as $3,000 per ounce in the next five years. While they remain bullish, they cautioned that many factors could affect the price of gold within this timeframe.
How much was 1 oz of gold in 1980? ›
With three record values to remember for the ounce of gold: $850 in 1980, $1,922 in 2011 and over $2,000 in 2020.
Should I buy gold right now? ›
The bottom line. Waiting for an investment price to change favorably is always risky but is arguably more so for alternative assets like gold. And although the price of the precious metal has risen significantly in the past few years, it still may make sense to buy now.
What is the relationship between gold and equities? ›
Correlations. Gold provides diversification in a portfolio and is often correlated with the stock market during risk-on periods, while it decouples and becomes inversely correlated during periods of stress.
Does gold have an inverse relationship with the stock market? ›
Over very long periods, Gold (and commodity prices) have an inverse relationship to the US Stock market. When Gold and commodity prices are in a secular bull market, the US stock market is in a secular bear market and vice versa.
Does gold have an inverse relationship with the market? ›
In general, they have an inverse relationship. Therefore, gold prices rise as interest rates fall, and gold prices fall as interest rates rise. However, as recent history has proven, it's not a direct correlation.
What is inversely correlated to gold? ›
As gold prices rise, the Australian dollar tends to rally, reflecting the country's economic strength. Conversely, the US dollar has exhibited an inverse correlation with gold prices in recent years.
