Spinning QE into Gold

 | Jun 08, 2012 | 11:05 AM EDT  | Comments
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Stock quotes in this article:

wmt

,

FB

,

gld

,

GDX

,

NUGT

There's a slight bounce off the poor open, but it's random action without any compelling themes. Wal-Mart (WMT) has continued relative strength, and Facebook (FB) is finally showing signs of life, but breadth is running solidly in the red and it is very slow going.

I'm playing FB and looking for day trades, but I want to comment on a longer-term play that is developing. Gold bounced big a week ago on anticipation of a move by the Federal Reserve this week, and has now pulled back as nothing immediate is forthcoming.

SPDR Gold Shares (GLD) was turned back at the 50-day simple moving average, around $157.50. It has support around $148 to $150, which is the recent low. I'm looking for that support level to hold and a trading range to develop, which is ultimately resolved to the upside when the Fed makes its next move. GLD is the go-to trade on any quantitative easing announcement; it's just a matter of timing it right.

There are quite a few different vehicles you can use to play gold. The individual miners often show better relative strength, but they tend to move in lockstep, so there isn't much to gain by picking individual names. You can play using the Market Vectors Gold Miners ETF (GDX), which has better relative strength than GLD, and if you want to be really aggressive, you can play something like Direxion Daily Gold Miners Bull 3X (NUGT), which is 3x leveraged gold mine play.

NUGT is my vehicle of choice, and I've started a very small position to track. I'll be looking to add either on pullbacks toward $10 or on a stronger move through recent highs at $14.41.

This is a longer-term idea, and I'm keeping it very small initially. I find that it is much easier to be aggressive with a trade like this if you already have a position and some sense of how it tends to move. This trade should be interesting as a proxy for potential QE, and I'll be updating the status of it on a regular basis.

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