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Why You Should Stalk Gold ETFs For Another Breakdown

Published 06/20/2013, 08:10 AM
Updated 07/09/2023, 06:31 AM
GC
0.63%

In early May, we sold short spot gold through buying Gold Double Short (DZZ), an inversely correlated “short ETF.” The trade worked out well, as we sold short gold when it bounced into resistance of its 20-day exponential moving average, which followed a massive break of key support. We subsequently covered about two weeks later for a gain of nearly 10%.

Since closing that trade, gold has been oscillating in a range, near its lows, and is now poised to once again break down below a key level of support. This is shown on the daily chart of SPDR Gold Trust (GLD) below:
GLD

As you can see, GLD closed right at crucial horizontal price support of its mid-April and mid-May lows. In the coming days, we will be monitoring GLD for a potential breakdown below this support level.

If a convincing break of support occurs, we will then look to sell short GLD (or buy $DZZ) on a subsequent bounce into new resistance of that prior support level. Although some aggressive traders like to sell short the actual break of support, rather than waiting for a bounce, we have learned over the years that such an entry in a short position can be risky because false breakdowns occur rather frequently.

Instead, a much lower risk entry point is to wait for the breakdown to occur, then look for a short entry into the bounce (just as we did with our trade in early May).

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