Vin Maru of The Golden Trader explains how the Gold Bugs Index ($HUI) may set up for a trading opportunity if gold corrects or remains in its current trading range.
At the beginning of last week, gold was still in the up channel, but something to watch for is gold diverging out of the channel, a move that could signal the start of a correction.
Last Thursday and Friday’s price action (Feb. 9-10) was concerning for short-term trading going into this week because gold is no longer in the strong up channel that has been in place for the last six weeks.
We mentioned that gold was bumping up against resistance at $1750 and that a reversal could be in the making. Gold most likely will continue its correction and sideways pattern during the early part of this week.
The first few days of this trading week will help to determine if gold still remains in the sideways channel that is now developing between $1720 and $1750. If the sideways channel holds for the first few days, then new long positions should be initiated at the lower end of the channel around $1720 with a tight stop loss.
We may consider selling our trading positions as gold gets closer to the top of the range at $1750, depending on the first few days’ trading action.
If the correction continues early in the week, then gold can move back towards a stronger support zone between $1665 and $1680, which is where I would feel more comfortable initiating new positions or adding to existing ones.
That would be a great time to add to physical holdings, where the prices converge around the 50-period displaced moving average (DMA) and the 200 DMA. If we do see the price of gold test this support zone and hold, we will look at initiating new trading positions.
Technical Analysis
After the Fed meeting, gold broke above the overhead trend line, a clear positive. Since the beginning of 2012, gold was trading within an up channel, but now is going sideways out of that channel. That is a neutral sign for now with a negative short-term bias.
The RSI has been coming down since the beginning of February when it hit a high above 70 (bullish); it’s now at 57.8 and working off overbought conditions. Look to enter long positions when the RSI approaches 50 or slightly lower.
The MACD was rising but is not starting to flatten out; it has yet to turn negative, so the sideways channel still holds. If we see gold start to sell off early in the week, then the MACD will most likely turn downwards with a fresh cross as we move to lower support levels.
This week’s trading range:
Support: $1720, $1680, and the 50 DMA at $1665 (strong buy)
Resistance: $1750, $1775, and then $1800 (exit trading positions)
