This sector doesn't have a friend in the world. It used to have many friends. I'm talking about gold, and I used to be one of its friends. In the past, it has treated me very well. And it most likely will again, sometime in the future.
Focusing on GLD, the SPDR Gold Shares ETF, the 44% drop since mid-2011 looks discouraging. But the price of gold, the tradable securities representing it, and the stocks of companies that mine and sell gold, typically cycle regularly and provide ample opportunities for short-term trading, regardless of the longer-term direction.
At first, a glance at the chart of GLD shows a ‘get out of my way, I'm going down' attitude.
But let's overlay volatility bands onto the chart. Bollinger Bands expand and compress according to the recent volatility of the stock. And right now, the bands on GLD's chart are showing another compression. Bollinger Band compressions on GLD's chart are usually followed by big moves.
One interesting thing about the current compression is the timing. While the GLD security has been in existence for only 11 years, it has an interesting track record for the next several weeks. Over the next 9 weeks, GLD has risen an average 4.2%, with only one loss in the past 11 years:
Concentrating on just the next 8 weeks, the average gain per year is higher, but there were two years of losses. However, 6 out of the 11 years produced gains of 6% or more, and the two losses were less than 5%.
Going back to the daily chart, I see support around the 100 level. So if I was going to trade this ETF, I might pick a stop-loss just below 100, say 99.9.
In looking over a longer-term daily chart, I see that breakouts from previous compressions typically produce 5% to 10% moves. I'm picking a current target around 110, which happens to coincide with GLD's 200-day moving average – a possible area of resistance.
So I see a trade where I could trade a compression breakout in GLD, risking 3.1% (the distance from the current price to a 99.9 stop-loss), and potentially gaining 6.7% (the distance from the current price to my short-term target of 110). This is a Reward-to-Risk ratio of 2.2.
If I felt the price of gold and GLD, the ETF closely following the price of gold, were more likely to rise than fall over the next several weeks, the Bollinger Band compression and the seasonal chart track record make this trade worth considering.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
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Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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