Here's How to Profit From a Countertrend Trade in Gold

The trajectory of gold prices has been lower for a long time, moving from the upper left of the chart to the lower right.  SPDR Gold Trust ( GLD) shares have underperformed the S&P 500 index by 108% over the last three years, but they are showing signs of short-term stability. Trading against the primary trend is speculative, but identifying a potential tradable countertrend move can be a highly profitable opportunity.

The GLD daily chart shows the fund consolidating over the last two months in an inverse head and shoulders pattern, with neckline resistance at the $104 level. That resistance is being reinforced by the 50-day moving average and is the top end of the Bollinger band range. On Tuesday, shares gapped over the neckline, forming a bullish hammer candle and closing near the high of the session.

The recent positive price action was telegraphed by bullish divergences in the momentum indicators. Daily moving average convergence/divergence is overlaid on a histogram of the weekly oscillator and is crossing above its centerline on both timeframes. The relative strength index is tracking above its 21-period signal average and has crossed above its centerline. On the money flow side, the money flow index, a volume-weighted relative strength measure, is above its signal average and centerline, and Chaikin money flow, while still in negative territory is taking out its rising 21-day average.

The GLD is a buy at its current level using a position size that accommodates an initial stop under the right shoulder of the inverse head and shoulders pattern. Taking a countertrend position against a strong primary trend is highly speculative, and the reward strategy should be a quick profit.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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