Why False Moves Create Fast Moves

10/22/2013 7:00 am EST

Focus: COMMODITIES

Joey Fundora of DowntownTrader.com analyzes the recent sudden swings in gold price action and shares potential opportunities in gold-related ETFs.

One of my favorite sayings came from my trader friend Brian Shannon, who said from false moves come fast moves. I always pay attention to a stock that fails either a breakout or a breakdown as it often leads to a sharp reversal in the opposite direction. This is due to a group of traders being “fooled” and forced to react to a rapid change in price.

While it was a bit overshadowed, in my opinion, by the moves in some of the indices Wednesday, gold may have had an important change in character Thursday. The metal as tracked by the SPDR Gold Trust (GLD) gapped sharply higher negating a recent breakdown under a key level. This occurred in tandem with the US dollar dropping sharply. Many had been watching GLD break under an important level near $123.70 a few days ago, but it actually held up pretty well near $122. I saw some calling it a head and shoulders, but I didn’t interpret it that way. I saw GLD trading down in a falling wedge, after breaking down from a rising wedge in August.

Regardless of how you label it, GLD failed to follow through on the downside and instead gapped back up over the falling wedge and its declining 20-day moving average. While GLD remains under its 200 and 50-day moving averages, it is starting to show some signs of life. It may be in the process of setting a higher low (needs to be confirmed with a higher high above $137.55) and the false breakdown may catch some market participants off guard.

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I’ll be watching GLD closely in the coming days as a trend change could lead to a strong move in the miners. While GDX is one possible play, NUGT and DUST are also great vehicles to use for short-term swings.

By Joey Fundora, Trader and Blogger, DowntownTrader.com

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