Wednesday’s CPI report shows inflation is finally ramping. And while bond investors are spooked, precious metals owners are cheering. Indeed, the likes of gold and silver received some love just in time for Valentine’s day. The SPDR Gold Shares (ETF) (NYSEARCA:GLD) — Wall Street’s go-to ETF for gold exposure — soared 2% amid heavy volume.
The technical picture of GLD has improved considerably over the past six months and yesterday’s pop provides all the reason needed to take a renewed look at the yellow metal.
A glance at the weekly chart reveals the multi-year rounded bottoming pattern that appears on the cusp of completion. Ever since January 2017, the GLD ETF has been carving out higher pivot lows, showing demand has quietly been building beneath the surface. The behavior of the RSI indicator is also telling. Despite many pullbacks, dips in the RSI have remained above 45, which is considered the bull zone.
The pivotal level to watch moving forward is $130. That has marked the top of gold prices for years now, and a break above it would mark a decisive change in character.
For greater detail let’s turn to the daily chart. Last week’s retreat was halted before breaking the 50-day moving average, keeping GLD in bullish territory. Yesterday’s ramp carried the fund back above its 20-day moving average and it is fast approaching overhead resistance at $129.
It’s worth noting the volume accompanying Wednesday’s surge was the highest volume up-day in over a year. This wasn’t some small-fry led surge, it was an institutionally driven buying binge. And that suggests further gains could be in the offing.
How to Make Your Portfolio Shine on the GLD Breakout
To capitalize on the coming breakout in gold prices let’s buy a call spread. Since the timing of the break is difficult to pin down, we’ll buy long-term options to provide ample time for GLD to make its move.
Buy the Jun $130/$135 bull call spread for $1.60. This vertical spread provides four months for gold to pop towards $135. If it doesn’t, your risk is $1.60 and it will be lost if the calls expire out-of-the-money. At $3.40, the potential reward is substantial and it represents a mouth-watering 213% return.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
