The gold market saw its ugliest fourth quarter in over 3 years and I have been watching the (NYSEARCA: GLD) closely ever since. Sentiment over that period became extremely bearish and countless analysts and other white noise contributors paraded out the $1,000 an oz price targets. However, gold has since bounced back and has appreciated 6.58% year to date and 3.56% over a 1 month timeframe. Buyers still appear skeptical of this recovery and many see it as setting up for a larger push to the downside. However, the technicals suggest that we should take the year to date recovery serious. With the recent recapturing of the key level of 116 on the GLD, the risk reward has become appealing to me as a swing trade. For individuals who are more concerned with a long-term perspective on gold, I authored a historical analysis that focuses on how the asset performs under various conditions and that can be reviewed here.
The following technical analysis is primarily viewed through the perspective of an Ichimoku cloud analysis. However, I also include Bollinger bands, the RSI, a COT report analysis, and a look at the Fear & Greed Index.
The Tenkan-sen, the fast moving average/signal line, registered a buy signal when it crossed the Kijun-sen, the slow moving average/base line, on January 5th, 2017. However, the trend was profoundly bearish at that point so it was a risky buy. I utilized the 3x ETF JNUG to play it on a day by day basis due to the trend. However, recently the price has pierced through the Kumo, which is the cloud area that represents support and resistance and is informed by the volatility of the security. Today marks the third day that the price has broken above the cloud and today's price action is completely above the Kumo. This is suggesting that the trend is likely to become more bullish. The lagging indicator, Chikou Span, has not confirmed the trend but I think the risk reward and other factors make this an excellent swing trade candidate. Essentially, two of the three indicators that one needs to initiate a long position are in place. The price is above the cloud and the signal line is above the base line. The only thing missing is confirmation of the trend from the lagging indicator.
Bollinger Bands/RSI - both of these indicators are signaling overbought levels with the Bollinger band registering a reading of 102 and the RSI is currently at 67. This certainly suggests that prices have overreached to the upside, and due to the elastic nature of prices they should be reverting soon. However, I believe this is the beginning of a new leg up and these indicators often read at extreme levels in a prolonged march higher.
COT Reports - COT reports are best utilized when put in a larger context and so my perspective stems from looking at how producers, users, and money managers have been positioned over the past few years. I see room for price appreciation in the gold market due to the reports. Producers are not screaming that prices are cheap and users are not locking in prices like it's a fire sale, but I am encouraged by how money managers are currently positioned. I am referring to commodity trading advisors, commodity pool operators, and hedge funds when I say money managers. These individuals have pulled back their exposure during Q4 which means that there is room for a renewed appetite. Money managers have been more bullish on gold than they are now 73% of the time over the proceeding 5 years.
Fear & Greed Index - The Index is only at a reading of 60 right now, but that doesn't tell the whole story. The S&P 500 is 4.33% above the 125 day moving average which is a marker of extreme greed and the yield spread between junk bonds and investment grade bonds, though historically not low, is considerably lower than in recent history. the US Markets have been extremely complacent over the past two months and given the political risk I think it's a net advantage to the gold market. Volatility ebbs and flows and it's been ebbing for a couple moths so this is in gold's favor. Furthermore, February has historical been a month of consolidation or a pullback for US equities when strong price performance in January is witnessed.
Risk Reward - I see the upside between 120 and 124, so let's call it 122 for the sake of the calculation. Furthermore, my stop loss is at 115.88 which is the edge of the Kumo. With the current price at 117 the reward to risk ratio is 4.46 to 1 which an ideal ratio. The RSI and Bollinger Bands are flashing an overbought reading and the lagging indicator has not confirming the trend, so I am only doing 50% of my typical position size.
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NOTE: Some Ichimoku cloud analysts will say that the lagging indicator is confirming the trend due to its relationship to the price 26 periods ago, but I was taught to wait until it clears the Kumo and I find that method more reliable.
Disclosure: I am/we are long GLD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.