Gold Charts Reveal Bullish Signals

The daily chart of SPDR Gold Shares is showing a cup-and-handle pattern, which is extremely bullish. Determining the direction of the broad stock market is trickier.
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By Chris Vermeulen of TheGoldAndOilGuy.com

NEW YORK (

TheStreet

) -- Last week looked and felt like a pivotal one for both stocks and commodities. The past two weeks have had investors and traders in a panic as they try to find safe places to put their money. It looks like the majority have decided to sell everything and be in cash for the time being. This is bullish for the stock market.

I will admit it has been tougher to trade recently because of increased risk levels due to the large 2%-4% selloffs and rallies happening within minutes. Although this has spelled profits for disciplined and experienced traders are able to pull the trigger quickly, this same price action can blow up the trading accounts of those who do not have the strategy, money management and discipline to take profits and cut losses very quickly. The speed of the rallies and selloffs can cause one to be up or down thousand of dollars in just five or 10 minutes. That is one of the reasons I have stepped back from being aggressive and am doing more observing, playing with small amounts of money and focusing on the larger trends at work.

My No. 1 goal is to make subscribers money with the least amount of risk, and watching the market swing 2% to 4% in minutes makes it extremely difficult to get everyone in and out positions with a profit before the market changes directions. As much as I love trading, some times the best position is a small one or to be in cash.

SPDR Gold Shares

(GLD) - Get Report

Here is my weekly updated chart of gold as it works its way through the correction from last year. The daily chart looks to be forming a larger cup-and-handle pattern, which is extremely bullish. If this pattern does a textbook move then we could see GLD reach $140 and spot gold reach the $1,400 area.

That being said, this pattern still has to complete the handle portion, which could easily last another four weeks, so I am not in a panic to add more to our position.

iShares Silver Trust

(SLV) - Get Report

Silver is in a similar situation. Because of the added volatility of silver, its chart doesn't look quite the same as gold's, but they are similar in many ways. Silver is used a lot for industrial purposes, and because the economy remains weak (though it is getting better) we are not seeing silver demand rise much. If silver can break this large resistance level then we could see silver surge to $25 (25%) this year.

United States Oil

(USO) - Get Report

United States Oil has held up really well in the past 12 months, but the recent selloff has seriously damaged the bullish outlook I had not long ago. Although it is oversold and looks to have started a bounce last week, the chart is pointing to lower prices over the longer term.

This USO fund has contango, which makes this fund underperform the actual price of oil. On Friday, oil prices were still trading at a key support level and could post a nice bounce if not trigger a new rally. The problem with following ETF's that have contango is that you do not see the real price action of the commodity. But that is were I come in, as I track the underlying commodity and relate it to ETFs for you.

SPDR S&P 500

(SPY) - Get Report

The stock market sure has been a roller coaster. The chart above shows you what happened in January for the last correction and where we stand now in comparison. If a setup is obvious in the financial market there is a very high chance it will not work out as planned. Knowing this allows us to be cautious and take profits at key short-term support and resistance levels.

Trend Trading Conclusion

In short, I feel gold and silver will drift around to digest the recent move up and to form the handle portion of the cup-and-handle pattern. Oil looks to have put in a short-term bottom, and if we get a small pullback in the coming days to test the intraday chart breakout level and touch the support trend line, we could look to take a position.

We tend to see the most price appreciation during the final stages of a trend, and we could have seen that on the dollar over the past six weeks. It looks as though the dollar could have put in a double top. If the dollar rolls over it would help boost precious metals, oil and stocks. But we will not know whether it's a top until there is a clear trend reversal, and that would take weeks to unfold.

As for the S&P 500, we have seen the same level of selling as we did in February and March 2009. High-volume panic selling has ruled the market since late April. One could argue that the market has bottomed given all the panic selling and that we should start another large rally lasting eight to 12 months. But one also could argue that this is capitulation volume, signaling massive distribution of shares and that every rally or bounce will be sold. Personally, I am torn between the two views, but I'm leaning more toward higher prices with a multimonth grind upward at slow rate.

If you would like to receive my trading analysis, thoughts and low-risk trading setups check out my trading services at

www.TheTechnicalTraders.com

-- Written by Chris Vermeulen in Collingwood, Ontario, Canada

Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.