Watching for a Golden Reversal

 | Oct 22, 2012 | 12:30 PM EDT
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Earlier this month, I discussed a healthy hurdle that SPDR Gold Trust (GLD) was facing on the upside -- a level calculated using a simple symmetry projection, otherwise known as a measured move. Even though the gold bugs were out at that time, we knew we had to watch for a possible failure if the price could not clear this key resistance decision. In this case, the prior rally swing took the stock higher by $25.73 between the Dec. 29, 2011 low and the Feb. 28, 2012 high. This swing was very similar to the $25.54 climb from the May 30, 2012 low to the Oct. 4, 2012 high.

This is essentially that same thing that just occurred in the S&P 500. I am including a chart of the E-mini S&P futures in further illustration of this concept.

E-Mini S&P 500 Futures -- Daily
Source: Dynamic Trader

The GLD, for its part, has seen a relatively healthy decline from the October high of $7.84.

To help you understand what I had been watching that suggested the rally might be terminating around that key resistance decision, see the chart below, which illustrates what I call a "trigger." For me, this is price action that would suggest a possible reversal. I only use these triggers in coordination with one of my three trade setups, or with my timing work.

GLD -- 30-Minute Chart
Source: Dynamic Trader

On the 30-minute chart above you can see that, after the $147.07 swing high, we saw a moving-average crossover to the downside -- one between the eight-day and 34-day exponential moving averages. The GLD also took out a prior swing high to the downside. When both of these moves occur, it suggests an upside reversal may be imminent. But, before we could once again consider the buy side in GLD, we would need to see a test and hold of a key support decision and/or timing, followed by a similar reversal signal to the upside.

Now let's take a look at the next key price levels. Since the bigger-picture pattern in GLD is still bullish, I am starting to watch this downside move for clues of possible termination of the decline and a resumption of the uptrend.

The next immediate decision on the way down comes in between $164.31 and $165.76. The price-cluster zone includes some symmetry projections, and it should be seen as a possible support level. I like this first zone quite a bit, since it includes 100% in price of a prior important corrective decline -- the $9.05 slip from the June 6 high to the June 28 low. Below that, I would next focus on the $158.29-to-$160.42 area.

GLD -- Daily
Source: Dynamic Trader

Besides the key price support that the fund is approaching, I want to watch the dates surrounding the next logical grouping of Fibonacci time cycles. These cycles come in between Oct. 25 and Oct. 26, so I will be watching to see if these dates -- plus or minus a day -- coordinate with the price work.

Bottom line: If one of these key support decisions is tested and holds, I will be taking it down to a 30-minute chart to watch for upside-reversal indications before I would place a bullish bet for a swing trade. It will be more ideal if the price coordinates with the timing parameters, though it is not necessary for the trade setup.

If you prefer to play it super conservatively, wait instead for a bullish crossover between the daily five-day and 30-day exponential moving averages before you again step up to the plate. Using the daily parameters instead of the intraday will increase the odds for success, though the entries will come in quite a bit away from the original support decision. The risk can be defined either below the price cluster zones, or below the low that was made prior to your buy trigger firing off.

Day traders, meanwhile, can use these zones using the same type of trigger chart on a five-minute time frame. Just don't take the trade overnight!

For more information about trades and triggers, please refer here.

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