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Will Gold Break Out? The Charts Provide a Hint

Gold has been trading better lately, but if we zoom out, the price action has been subpar. Here's how to trade the yellow metal.

Gold has been a very interesting trade this year, as investors have expected a rise in inflation to boost the yellow metal.

That has happened to some degree, with gold prices up 22% on the year.

While that gain outpaces the S&P 500’s 14% gain, it lags silver’s 40% year-to-date gain and wildly lags bitcoin’s run of almost 170% in 2020.

Remember, legendary trader Paul Tudor Jones called bitcoin the “fastest horse” in the race.

It was his preference vs. gold and other plays at a time where the Federal Reserve, Congress and global central banks were taking unprecedented and coordinated action to fight the economical impacts of the coronavirus.

With authorities printing more money and pouring stimulus into the economy, investors’ expected asset classes — like gold, stocks and bitcoin — to see big gains as a result.

With all that said, gold prices have lagged lately. Despite the recent bounce, gold prices are still 10% below the early August high. Let’s look at the charts.

Trading Gold

Daily chart of the GLD.

Daily chart of the GLD. 

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For the gold trade, I am looking at the SPDR Gold Trust ETF  (GLD) - Get SPDR Gold Shares Report. As you can see, the stock has been locked in a downward channel (blue lines) since topping out in August.

When I look at the daily chart above, I see a fakeout. The $173.75 level had been support for the past few months, but in late November the GLD broke decisively below this level, tumbling 2%.

The next day, it gapped down 1.5%, then quickly gapped below the 200-day moving average. That gap below the 200-day in combination with taking out the low in the following session was the fakeout, likely shaking out a lot of bulls.

After all, without the channel in play, GLD looked to be breaking down.

Now, not only has channel support held, but the stock has reclaimed the 200-day moving average and the key $173.75 level.

Now things get interesting, as the shares challenge channel resistance near $175. If the stock fails to clear this mark, I would prefer to see the $173.75 level hold as support, followed by the 200-day moving average.

I don’t want to see another lower low, even if channel support holds again.

Should GLD clear channel resistance, it has to contend with the 50-day moving average near $176.50. More notably, it faces the $179.25 level — which was support that turned to resistance — and the 100-day moving average.

Above those and the stock can fill the gap up toward $183 and challenge the November high.