Bolling: Gold in a Pennant Race

Gold is breaking out of its pennant just as everyone begins to gear up for the Olympics in Beijing. As we head into the July Fourth weekend, the Olympic trials -- the competition to decide who will represent the nation in the games and go for the gold -- are heading down the homestretch.

Let me explain the logic and psychology of a reliable technical pattern -- the pennant. After a market, in this case gold, makes a big move in either direction, it starts to get volatile. Big moves up are met with big moves down.

Both bulls and bears are confident and take turns pushing the price up, then down. This goes on for days, but as time passes, the trader instinct begins to kick in ... "Why isn't this following through?"

The moves up and down become less and less exaggerated. The pattern that forms is called a pennant because the widest part of the flag is at the beginning and eventually closes in on a small point at the tip.

Pennants are great predictors of a substantial price move, but there is a catch. We don't know which direction the big move will go. The psychology again: The pent-up bulls and bears are ready to add conviction, but only one will win and we aren't sure which one. So, we wait for the "breakout."

Gold Could Hit $1,300

Some markets seem to trade in similar ways for years. Gold has been forming pennants and breaking out of them for the last two. It broke out of the pennant two years ago that had been forming for most of the year.

On Nov. 6, 2006, it finally made the push through $635. It needed to confirm the breakout. I was on air that night talking about it. To be perfectly honest, the other guys on the panel looked at me like I had three heads. Talking of a bullish pennant breakout on CNBC? It wasn't easy, I tell ya!

Gold also formed a small pennant recently. By trading up to, and settling at, $826 on Dec. 26, it broke out to the upside again before its historic run-up to $1,034. With the recent run-up in gold, the similar pattern looks like yet another upside breakout. I think owning gold here is a good play. I am inclined to add to my position if it dips into the support area of $925-$900. Therefore, I am adding pieces to the position, not jumping in with all four feet.

As for the miners, I think many like Goldcorp (GG)and Kinross (KGC) are great ways to play the gold move.

I also like Anglo American(AAUK), the big South African miner. It has exposure to other metals as well as gold. It has been held back a bit due to its diamond business. In a slowing economy, diamonds might be the first retail product to be put on hold until things get better.

The best way to play the gold breakout is through the SPDR Gold Shares ETF (GLD). It's the purest play on the price of gold. There are no mines to dig, no workers ready to strike. There are no issues regarding the availability of electricity to power the mining process. And there is no risk of a greedy dictator nationalizing your investment in a show of "sovereignty to his people."

GLD trades in tandem with prices in New York and London. GLD has a market cap of $17.6 billion, so the liquidity is fantastic. It trades like a stock and can be shorted for those who completely disagree with my assessment of the chart!

Trade with your head, not over it!

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