How to Trade Gold Shares

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Gold shares are unique. Most indexes have followed pretty much the same pattern. Not gold. We thought today we’d have a look at something out of the norm, to see if there are some gains brewing.

Gold shares have traded in a large channel since last September. It’s taking both the good and the bad at this stage. On one hand, there are the rising prices of bullion. Gold has moved up to US$930 just this morning. On the other hand, it has suffered from generally choppy share conditions.

The price action of the index illustrates those contrarian forces. The chart is a succession of fast moves in both directions. It’s a rangy market where no clear long-term direction appears.

We’ll see what our indicators think of that…

Between August and November 2007, the index rose by more than 55%. Two other attempts to break above 7,000 level failed. Those historical high points constitute the resistance line of the current trading channel.

The low was posted on April 30 just above 5,100 points, which is support line of the trading channel.

The technical indicators show that mixed signals argue for a further rangy trading price action during the coming weeks. For traders, there’s a lot of potential to pick up some gains.
The 14-day MACD is bullish. This, one of our favourite indicators, fell to a historical low levels at the beginning of May. Then it turned up and then crossed above the 0 line. The underlying index was clearly oversold. It argues for upward momentum in the mid-term.

A moving average crossover agrees. The 10-day MA crossed above the 50-day MA last week. It’s a buy signal for mid-term trend-followers.

The 5-day Stochastic Oscillator, however, respectfully disagrees. But it disagrees on a shorter time-scale. The oscillator says that gold shares have gotten a little hot in the last few days.

The signals may disagree, but the conclusion is clear. There’s money to be made in the medium term according to the charts. But you could perhaps wait for a decent correction before moving in. The next price target is perhaps 5,300 points a 38.2% Fibonacci retracement. Then traders will look to switch back to long positions.

Gabriel Andre
The Daily Reckoning Australia

Gabriel Andre
A former Futures and FX trader/portfolio manager, Gabriel Andre has worked in several hedge funds and asset management firms, both in Europe and Australia. He is a contributing editor to both Diggers & Drillers and the Australian Small Cap Investigator.
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