With the price of gold continuing to hug the magic $1,000 mark, it might pay to take a step back, away from the day-to-day fluctuations in the price of the metal to see if we can glean any insights as to the validity of its current uptrend.
Click to Enlarge
Graphics credits: Metastock/ CS Scientific expert advisor
This is a monthly chart of the Handy and Harmon base price of gold, plotted back to the beginning of the secular bull market that began in April 2001. Overlaid on the chart is a simple 12-month moving average (SMA)(red line), which also happens to be one of the most useful primary trend indicators available for any market you happen to follow. In the case of gold, note how it has spent the overwhelming majority of the past eight-and-a-half years above that moving average, and that for most of that time, the slope of the 12-month SMA was moving higher, a clear indication of a primary bull market.
Next, drop to the lower portion of the chart and witness the Aroon (14) trend intensity indicator. Much simpler to interpret the more ubiquitous Average Directional Index (ADX) indicator, the Aroon does an excellent job of confirming the start of every major trending phase on this monthly gold chart. As long as the Aroon’s blue line is above the red line and the blue line has a reading of 70 or higher, the trend is presumed to be up. In similar fashion, the CS Scientific expert plots a ”‘+L+” in a gray ribbon at the bottom of the chart each time a trend reaches critical mass, normally suggesting that long positions are to be favored during such phases.
Using all three of these indicators and/or advisors together yields very powerful results (with the average gain in Gold during each +L+ phase being 12.24%), and could be a terrific way for traders operating in lower time frames (daily and weekly) to help time their trading system entries or investment purchases/sales. You could also conceivably use this basic template to help design a covered call system in stocks. As long as the primary trend on the monthly chart is bullish (similar to the monthly gold chart above), traders might have extra confidence that their weekly-based covered call trades will have the staying power to yield maximum benefit at the time of options expiration.
The possibilities are endless and very exciting no matter what markets you trade.
If you have Metastock, consider creating a template similar to what is displayed above and see if it doesn’t give you added confidence with which to trade your favorite stocks, ETFs, mutual funds, or commodities.
By Donald W. Pendergast Jr. of ChartW59.com
