After bottoming out at the $107 level on Dec. 20, the SPDR Gold Trust (ETF) (NYSEARCA:GLD) has rallied 5% over the past 10 trading days. On Thursday, GLD shot higher by 1.55%, the largest move in over a year, prompting me to seek out trade ideas in the Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT), a leveraged gold miners product.
While it looks like gold may have put in a significant bottom for now, the real question is how much higher can it climb, and what technical levels to watch going forward.
The first major hurdle for GLD is the major resistance level at $115. This was an important support level that held twice (last April and June) before breaking with conviction on Nov. 22. For gold to head appreciably higher, it needs to both take out this key level and then hold it.
A longer-term 10-year weekly chart reinforces the importance of the $115 level. This has been a critical swing point for gold on a longer-term basis, as evidenced by the chart.
After reaching a deeply oversold reading, GLD was due for a bounce. Certainly the surprise move by China to support the yuan staunched the recent strong rally in the U.S. dollar. Since gold prices are seemingly inexorably tied to dollar strength, it is critical to always keep a close eye on the U.S. dollar when trading gold. While the Federal Reserve has said it will raise rates three times this year, I think they will raise only once or twice, which will be a definite benefit for gold.
Shares of GLD are getting a little overbought as 9-day Relative Strength Index (RSI) approaches the 70 level. Previous times GLD reached these levels marked short-term tops, so pullbacks are not to be unexpected.
The previous two rallies in gold ultimately had upside gains of 18% and 15%, respectively. If we expect similar results again, this would equate to an upside price target of GLD at the $123-$126 level.
How to Trade Gold Here: The NUGT
Traders looking to aggressively play a breakout may want to consider Direxion Shares Exchange Traded Fund Trust (NYSEARCA:JNUG). This ETF aims to capture triple the daily move of the NYSE Arca Gold Miners Index. It is designed for very short-term trading, not investing, but it can greatly amplify the daily moves on gold mining shares.
To the downside, a failure to hold on to the $107 double-bottom low in GLD would certainly take away the bullish technical thesis for gold. But for investors looking to add the yellow metal to their portfolio, now is probably not a bad time to add a little luster to their holdings.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at firstname.lastname@example.org.