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Deron Wagner is the founder and portfolio manager of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his swing trading strategy with The Wagner Daily newsletter, which provides exact entry, exit,... More
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Morpheus Trading Group
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Morpheus Trading Group - swing trading blog
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Advanced Technical Analysis of ETFs
  • Don't Miss This Pivotal Breakout In Gold ETFs ($GLD, $DGP) 0 comments
    Sep 3, 2012 6:15 PM | about stocks: DGP, GLD, SLV

    Throughout the latter half of last week, we were stalking DB Gold Double Long ($DGP), a gold ETF that is a leveraged version of the popular SPDR Gold Trust ($GLD), for potential buy entry (review our initial Aug. 27 technical analysis of the trade setup here and our Aug. 29 follow-up analysis here). Going into last Friday's (Aug. 31) session, DGP was listed on the ETF trading watchlist section of The Wagner Daily newsletter as a potential ETF swing trade buy entry, just above the high of the previous day (Aug. 30), which also converged with the 200-day moving average.

    Gapping higher on the open, DGP quickly triggered our buy entry, violently reversed all the way back down to just below the previous day's low, then headed back up again. Ultimately, this wild intraday price action was a "shakeout" that absorbed overhead supply (resistance), and enabled DGP to more easily move higher in the afternoon. Admittedly, it was a rough start to the morning, as $DGP initially plunged to nearly hit our protective stop price shortly after buy entry (Fed days are always tricky to trade). However, we stuck to the plan of our initial stop price and, less than one hour later, DGP had turned tail and rallied to a new intraday high. Thereafter, it rocketed higher in the afternoon and never looked back. When the dust settled, this leveraged gold ETF had concluded the day with an impressive 4.3% gain, positioning itself for further upside momentum in the near-term.

    On the daily chart of DGP below, notice that the ETF has now convincingly broken out above resistance of its 200-day moving average (orange line), and is following through to the upside of its "bull flag" pattern (channeling blue lines) that we pointed out in our August 29 technical anlaysis of DGP:

    (click to enlarge)$DGP (gold ETF) chart pattern

    Taking an updated look at the long-term monthly chart pattern of DGP, notice that it has also broken out above resistance of its downtrend line that began with to September 2011 high. This indicates that the one-year correction within its six-year uptrend may be finished. If it is, spot gold and DGP may now be ready to resume its dominant, long-term uptrend. Remember the longer a trend has been in place, the more likely the dominant trend will remain intact:

    (click to enlarge)$DGP (gold ETF) monthly chart pattern

    With our ideal entry price of $52.16 on August 31, just above convergence of the 200-day moving average and the August 30 high, this ETF swing trade is already showing an unrealized gain of 3% on the first day of entry. Now that gold has broken out above a pivotal level of price resistance, we anticipate bullish momentum to carry gold ETFs such as $GLD and $DGP substantially higher, both in the near and intermediate-term.

    With a price target of $56.80, we bought DGP with the intention of it simply being a short-term, momentum driven swing trade. Given the strength and high volume this gold ETF showed last Friday, DGP may actually rally to our target price rather quickly. If and when it does, we will automatically sell into strength to lock in a quick gain of nearly 9% on the trade. However, this does NOT mean we expect the gold breakout and rally to conclude when we sell. Rather, we simply anticipate a normal price retracement to occur near that level.

    If a pullback forms when DGP takes a rest, it may result in the formation of another "bull flag," or perhaps a multi-week price consolidation, before DGP attempts to resume its newfound upside momentum. Since most of our swing trades are of a short-term nature, we prefer to simply wait for the next low-risk entry point to re-enter the trade, rather than sitting through a pullback or lengthy price consolidation. Nevertheless, intermediate-term traders may be comfortable sitting through a healthy price corection, and there is nothing wrong with that approach either. It's just a matter of one's personal risk tolerance, and we usually err to the conservative side when it comes to profit taking with ETF trading.

    Over the weekend, we received an e-mail from a subscriber asking if buying a silver ETF (such as $SLV) was possibly a better trade right now than being long a gold ETF ($GLD or $DGP). Although spot silver has indeed been showing relative strength to gold over the past several weeks, we still prefer a play on the gold ETF right now because the longer-term (weekly and monthly) charts show less overhead resistance than with the silver ETFs. In tomorrow's ETF analysis for subscribers, we will dive into that in more detail, along with a few annotated charts of gold and silver for comparison.

    As for the overall broad market, we were encouraged by last Friday's "accumulation day," which should set a positive tone to the start of trading in this holiday-shortened week. Most of our other open positions (both ETFs and stocks) are looking pretty good now as well, and should be primed to rally higher if the main stock market indexes cooperate.

    The technical commentary above is a shortened version of the September 4, 2012 issue of Wagner Daily, our daily stock and ETF trading newsletter and stock picking service since 2002. Subscribers to the full version receive our exact entry and exit prices for all trade setups, access to our technical trading strategy with market timing system, and access to our "turn key" technical stock screener software. Start your risk-free subscription to our swing trader service for less than $2 per day (based on annual rate) at http://www.morpheustrading.com.

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    DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

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