Technical indicators are suggesting that a major move in gold is coming. First, the weekly chart of gold futures (see Figure 1) shows that the gold price is near the bottom of a well-defined range of $1550-1800. Thus, a break below the major support level is likely to produce heavily selling - a major move to the downside. Likely, if the support level of $1550 holds, the next move is likely to be sharply to the upside, back to the resistance level of $1800.
The daily chart of gold futures (see Figure 2) shows the behavior of gold price near the key support level, which could give some insights about the direction of the next move. Gold sold off in February as the $1640 support level was broken, which led the price to drop to the major support level of $1560. Next, gold quickly bounced back to $1620, but retreated to the $1580 level, with brief intraday visit to $1560. Subsequently, gold made a move to $1600, but failed to complete the double bottom pattern. Now it appears that gold is forming a triangular pattern, with the point right near the current level of $1580-1585. Thus, in our view, both, the bulls and the bears are currently hesitant. However, looking back at the weekly chart, a similar triangle (pattern) produced a major move to the upside in Fall of 2012. Thus, we believe that the current daily pattern of gold prices is bullish.
What is the appropriate strategy?
We would recommend to buy (GLD) if the gold futures close above $1620, which would confirm the bullish pattern. Specifically, a close above $1620 is significant for several reasons. First, the gold chart would confirm either a breakout from a triangle, or a double bottom (if gold first goes back to the support level of $1560). Second, many traders are looking at the same chart, so a close above $1620 would increase the speculative demand, first as swing traders return, and next as trend-followers return. The return of speculators is likely to produce a major move in gold to the upside, which supports our thesis.
We would not recommend shorting gold if the price breaks the support level of $1560, since a major short covering squeeze can potentially occur given the current negative sentiment for gold. Thus, gold bears should rather buy puts on gold futures or gold ETFs such as GLD.
Figure 1. E-Micro Gold Futures April contract, weekly chart.
Figure 2. E-Micro Gold Futures April contract, daily chart.