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Gold Is Breaking Out - Here's the Trade

Gold prices on Thursday began to break out, putting a potentially larger move in play. Here's a look at gold and the GLD ETF.

Gold prices on Thursday are heating up when the S&P 500 is under selling pressure.

While well off the lows, the index is still down close to 0.75% on the day. The decline comes as another disappointing jobless claims report hits the headlines.

The economic situation is becoming dire and it has forced federal governments and central banks to step up their stimulus efforts. 

Aside from being viewed as a safe haven by many investors, gold is expected to gain as the Fed and others print more money.

Last week, the Wall Street investor Paul Tudor Jones was looking for inflation plays that would benefit from the increasing action among central banks. He eventually settled on bitcoin because it’s the “fastest horse” in the group.

But that doesn’t mean gold shouldn’t benefit too. Let’s look at the charts.

Trading Gold

Weekly chart of the GLD ETF.

Weekly chart of the GLD ETF.

Physical gold and/or gold futures are the best way to gain exposure, but may not be the ideal investment for retail investors. 

Instead, they may prefer the VanEck Vectors Gold Miners ETF  (GDX)  or the SPDR Gold Trust ETF  (GLD)

Looking at GLD on the chart above, we see the weekly consolidation. With Thursday’s rally, gold is looking to go weekly up, as it takes out the prior week’s high.

If it can do that — end this week above last week’s high — then we may see a continued rotation higher. In that case, it puts last month’s high of $164.42 on the table. Above that and the GLD can go monthly up, putting even more upside in play.

I like this chart, as the breakout over ~$158 was very clear. It then consolidated in a relatively tight sideways pattern. A look at the daily chart above shows the importance of Thursday’s rally.

Daily chart of the GLD.

Daily chart of the GLD.

Not only is the GLD ETF rotating over its weekly highs, but gold is clearing downtrend resistance (blue line). A move over this mark puts last month’s highs in play.

One concern here: So many seem bullish on gold. Its choppy action over the past few weeks was good, as it allowed the metal to digest the recent rally and perhaps shake out a few weak-handed bulls.

But as the old thinking on Wall Street goes, when too many investors are bullish, it can be a warning sign for those who are long. I don’t think we’re there yet with gold, but it’s something to keep an eye on.

On the downside, a break of the 20-day moving average would be a concern. It puts $157.50 to $158 back in play — an area we don’t really want to see given Thursday’s breakout action.