A Simple Way to Analyze Gold
12/30/2010 12:03 am EST
I’m a big fan of monitoring price—particularly in a trending environment—with respective 20- and 50-day exponential moving averages (EMAs).
Recently, gold (and gold ETF GLD) have shown good examples of how EMAs serve as good reference points for expected/potential support in the context of a rising bullish trend.
Let’s take a look at the current charts of gold and GLD to see this example in motion.
The chart above is a simple price and EMA (20-, 50-, and 200-period SMA) chart with default Bollinger bands.
I wanted to cut through the chart to focus your attention on the two recent pullbacks—and subsequent price rallies—off the rising 50-day EMA, which is currently positioned just above $1,360.
In a powerful uptrend, price will support off the rising 20-day EMA (green), as you can see was the case in August/September. Price slightly nipped under the 20-day EMA in October prior to the surge to the November highs.
This is how you set up simple entries into prevailing price trends and manage the trade by trailing the stop slightly under the 50-day EMA or corresponding confluence support (Fibonacci, Trend line, etc.).
Let’s drop down to GLD, the popular ETF for trading gold swings.
The trading theory goes that price swings up and down in the context of a prevailing trend, so pullbacks in the context of a rising trend offer the best risk/reward in the expectation the trend will continue instead of reverse.
And if the trend does reverse and breaks through the expected support of the EMA, then you take a stop-loss and protect capital.
If the trend continues and rallies upwards off the EMA support, then you have a great trade that often takes its exit with a reversal candle at the upper Bollinger band or lower time frame divergence signal.
Look at the prior touches, or tests, of both the 20-day (in green) and 50-day EMAs (in blue) and the resulting rally that formed.
You can enhance your entry by waiting for price to break above a classic reversal candle such as a doji or hammer.
Retracement trades can either target the immediate prior swing high (for a conservative exit) or just beyond that price (expecting a new swing high) with the exit being a break under a reversal candle at or near the upper Bollinger band.
The price in GLD is currently bumping against the top Bollinger band and round-number resistance at $138.
Remember, trends can’t last forever, but they often do last longer than most people expect. Hence, it’s generally unsafe (from an edge standpoint) to short sell a rising trend or fight a trend in motion.
The best signals to play for a reversal often come after lengthy divergences where price breaks a key rising trend line, or easier to see, breaks the 50-day EMA.
Study past charts for examples of these concepts and apply your new knowledge to similar current and future set-ups or price trends.
I’m excited to announce that my new book, The Complete Trading Course, will be available for purchase on January 11 from online retail stores. The Wiley Finance page has the description and list of online availablity. I’ll keep you posted on new developments as well!
(I reference some examples in the book of trading concepts using gold prices in a similar method as shown in this post).
By Corey Rosenbloom, trader and blogger, AfraidtoTrade.com