Is Gold Ready to Rise Again?

 | May 08, 2013 | 5:30 PM EDT
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In my April 24 column, Gold Topple Paves a Way Back, I proposed that the gold bears have seen their day. Over the past several weeks, we have yet to see them return. Gold continues to hold up well and the recent activity lends even more credibility to the bullish side of this market

On the larger weekly and monthly time frames, the bulls must be patient. A retest of last month's lows, and even a slightly lower low, could occur before a true recovery takes place. Nevertheless, I even more convinced that this dog will recover

As we wait for stronger monthly strategies to develop, a short-term play what would go a ways towards aiding that recovery is now forming. On April 26th gold hit resistance on the daily time frame as the gap zone from the April 15th collapse closed. Since then the commodity has been congesting on the 90-minute and daily charts, hugging that resistance level

In the chart below of the SPDR Gold Trust (GLD), that daily resistance is also corresponding to the 20 day exponential moving average. Meanwhile, volume has slowed. Despite several attempts to flush lower on May 1st and again on May 7th, gold has recovered strongly and most of the price action within the recent channel has been at the upper end of that channel.

SPDR Gold Trust (GLD) -- Daily

The pattern that is currently begin formed in gold on the daily time frame is one that I have dubbed a "Phoenix." The ideal core characteristics for this strategy are as follows:

  1. An average to stronger-than-average move off a trend low. This can either be off the last low in a downtrend or the last low in a trading range.
  2. A primarily sideways trading channel or a period of congestion holding in the upper one-third of the prior rally.
  3. Declining or flat volume as the period of congestion forms.
  4. At least two notable lows within the period of congestion.

Gold meets all of the above criteria. A buy trigger on gold will take place when this week's highs break to the upside. For this particular strategy, should the congestion continue into next week, the trigger will be above the last high in the congestion within the five days prior to the breakout.

Protective stops are always a "must have" for me and on a "Phoenix" that stop is below the last pivot low within the channel of congestion. That is currently the low from May 7.

A target zone for this strategy is the price point at which gold broke lower at the beginning of April. In GLD, that level is the price zone of $150. I want to see GLD hold $139 for this strategy to remain valid. If it does not, it will likely be another two weeks before it offers another setup that I would be comfortable with.

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