News Analysis date published New: 
Monday, November 19, 2012 - 16:00
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Monday, November 19, 2012 - 16:00
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Monday, November 19, 2012 - 16:00

3 Reliable Indicators Show It's Time to Buy Gold for a 10-Point Move

Monday, November 19, 2012 - 4:00pm

Short-term trading can be profitable, but can also require a great deal of time to find trades and then execute them in fast-moving markets. Because of those challenges, I also look at long-term trading opportunities, hoping to find positions that can be held for six months or more. To do this, I rely on a 26-week rate of change (ROC) strategy that has delivered steady gains over time.

Occasionally, there will be times when signals that work in the long term also highlight short-term trading opportunities. When that happens, the strategy of buying on a pullback can add to the profits.

Buying pullbacks was a popular strategy in the bull market of 1982 to 2000. Because it was a long-term bull market, buying on a short-term decline helped traders increase their gains. Since 2000, traders have endured two bear markets where buying pullbacks has not worked as well and has more often led to larger losses as prices continued falling. Since buying pullbacks can be so profitable in a bull market, traders should try to minimize the chances of buying into bear markets by following several indicators.

We can start by using the 26-week moving average (MA) as a trend filter. If prices are above the MA, then we can consider the stock or ETF to be in an uptrend, which is the best time to buy pullbacks.

Risk can also be decreased by only buying when the relative strength (RS) is greater than 80, meaning the stock or ETF has outperformed 80% of the market.

Finally, we can use the Momentum of Comparative Strength (MoCS) to pinpoint the time to buy. MoCS converts RS to a MACD-style indicator and offers clear buy signals.

All of these conditions are met now and signaling that it is time to buy SPDR Gold Shares (NYSE: GLD).

GLD has been confined to a trading range between $150, which is acting as support, and $174, which has offered resistance over most of the past year. The rounding bottom pattern formed during that range offered an upside price target of $174, the resistance level that stopped the recent advance. Prices then pulled back but held above the 26-week MA. RS is now at 95, and MoCS just gave a buy signal.

In the past when MoCS has signaled a buy, GLD has generally delivered strong gains. A month after these signals, prices have moved up by about 5%, and 68% of the trade signals have been winners. That would put GLD on target to reach $174 by the end of November.

Three months after a signal, GLD has delivered an average gain of 10%. The 26-week MA could be used as a trailing stop, initially risking 3.8% on the trade, but the stop should move higher with gains in GLD.

Action to Take --> Enter buy stop order on GLD at $168.10. Set initial stop-loss at $161.64. Set price target at $184 for a potential 10% gain in three months.

This article originally appeared on TradingAuthority.com:
3 Reliable Indicators Show It's Time to Buy Gold for a 10-Point Move

Michael J. Carr does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.