How to Trade the GLD

 | Mar 19, 2012 | 10:00 AM EDT  | Comments
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In the recent past, most commentary on SPDR Gold Trust (GLD) has seemed to be relatively bullish. More recently, though, you've probably been hearing mixed sentiment and varying proposed scenarios for this market. What is a trader to do?

Well, you can define your risk and only place strategic bets when everything lines up. I'm actually seeing a buy zone from which this fund is bouncing that comes in between $157.72 and $158.82. This zone includes a 0.618 Fibonacci retracement of the major swing of between the Dec.  29 low to the Feb. 28 high, as well as two price extensions of prior swings and a 100% projection of a prior decline.

So far, the GLD has been bouncing above this key support, and if the price remains above the recent low at $158.80, then the upside target -- for a move from this low -- will come in around $178.13. If the $157.72 level is violated instead, then I would be stopped out of any long entries. At this point, I'm only OK with taking day trades against the daily zone.

GLD -- Daily
Source: Dynamic Trader

With all the crosscurrents in this market, though, I'm going to wait for a safer, higher-probability bet before I use this zone for a swing trade. For that, I need to see GLD clear the key resistance decision at the $162.52-to-$163.60 area, and by a decent margin. This is also illustrated on the daily chart. The zone includes two key 100% projections of prior rally swings since the Feb. 28 high. It also includes a couple of key price retracements of the prior minor swing.

If the GLD clears this area, that will increase the odds for a continued rally from key support. Failing to clear it, meanwhile, would tell me the GLD is still vulnerable to the downside.

Let's say, for example, that the GLD rallies to the $165 area. That would be a break above the key resistance decision, and would support a continued rally from the $158.80 low. In that case, I would look at the next pullback to that low (by a range of 50% to 78%) for a buy entry. I'd use options in this case, and I'd define my risk -- that is, place a stop -- below that same key low.

The odds would climb in favor of the buy-side play. That's because breaking the "symmetry," or 100% projections, from the prior decline typically precedes at least a deeper upside correction, and sometimes a more important reversal. If that resistance isn't taken out, I will stand aside.

Keep in mind you can use these Fibonacci levels in whatever manner you like. Some use them for scalping, some for day trades and some for swing trades. For example, if you prefer the short side, then define your risk above the resistance decision posted above. Bottom line: These levels can help you define some relatively low-risk bets. Decide what kind of a trader you are and use them accordingly.

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