How to Play Gold's Death Cross

 | Jun 22, 2018 | 3:13 PM EDT
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Gold's 50-day simple moving average is easing beneath the 200-day simple moving average as we head into the weekend. Traders know this event as a death cross.

Does this spell a death knell signaling a time to sell the SPDR Gold Shares ETF (GLD) or is it more like an overblown opportunity that we should buy? 

Sometimes I find it best to look behind us to get a clue as to where we are going.

Over the past decade, we've watched (GLD) trigger half-dozen death crosses. While 6 instances isn't a huge sample size, the notoriety the death cross receives along with the 10 year time frame does give us something to work with, so what has the past demonstrated. Let's take a quick look at each of the past six death crosses.

Let's start with a cross in September 2008, right in the midst of the financial crisis. Traders saw a quick 6-7% drop in gold, so if you sold or were short, you felt pretty good about your position ... for about two weeks. In a matter of days, the shiny metal shot higher putting death cross sellers about 15% underwater. The good news the bounce failed about a month later. Patient (probably also undisciplined) traders could have made a nearly 12% gain if they timed their exit well. Ultimately, gold traded much six months after the cross.

 

Next, we jump to April 2012. Shorting the death cross provided almost a four month stress free trade with the opportunity to make an easy 4 to 7%. There was no real threat of a losing trade until a bottom was clearly in place. Six months after the death cross, gold was significantly higher...again.

 

Spring of 2013 brought traders yet another death cross. This offered the easiest and most profitable trade of any cross in the last decade. Traders have not one, but two chances to net 24% gains on the drop. Even waiting for a bullish cross offered profitability. Gold still hasn't seen these levels since that cross.

 

A little more than a year later in 2014, GLD once again triggered the death cross. Twice! The first time offered little profit nor much in the way of a short-term loss The second cross saw action though. A quick drop, but then, much like 2008, the metal bounced. I find it hard to believe traders wouldn't have stopped out for a loss if they hadn't taken the quick 5-6% gain on the first drop. If a trader did manage to stay with this trade, they could have snagged a maximum profit around 15%.

The most recent death cross occurred Thanksgiving 2016. Again, bears benefitted from a quick 6-7% drop, but once again, gold bounced offering little opportunity to profit big. The upside here to the downside is even those that didn't take a profit likely didn't suffer much in the way of losses.

 

What conclusions, if any, can we draw from a simple study such as this one?

The most obvious conclusion I have is the death cross is, in fact, bearish in the very short-term. Five of the past six death crosses offered an opportunity to grab a quick 5-7% move lower. The only one that did not was relatively benign in terms of gains or losses. Second, the volatility really kicks up over the next 6 months. Whether higher or lower, one should anticipate a pretty good size move on the horizon. Post death cross, double digits moves are the rule rather than the exception. Third, this is not the time to play hero or bet against the trend.

Based on what we've seen over the past decade, I'd target $110-$113 on GLD from today's close.

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