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Trading the Gold Surge

Gold was on a tear recently. April gold (GC) futures bottomed at 1046.6 in early December, and took off in January. In early February the buying ramped up, hitting a high of 1263.9. On December 3 a major buying opportunity was discussed, which would have gotten you into this run higher. The question is what to do now?

In the short-term, gold is overbought. It slightly eclipsed the top of its three-year trend channel, which is a resistance zone. The resistance zone was broken by the 20% rally, but the price quickly retraced. Volume also accelerated, indicating a short-term peak.

The volume spike in gold futures isn't as pronounced as it is in the SPDR Gold Shares (GLD). Typically doing 8 million in volume, it spiked to more than 48 million on February 11. That indicates potential buyer exhaustion, confirmed by the price closing well off its high (on Feb. 11) and the strong selloff on February 16.

Therefore, expect a bit more of a pullback. Gold typically has deep retracements, so a 50% to 61.8% pullback of the recent move isn't unlikely. That means the price could pull back to 1155 to 1125. If that pullback occurs it's a major long-term buying opportunity, as the trend has shifted to the upside...assuming the pullback stays well above the 1046.6 low, which is expected. With the recent high, and a potential higher low based on the pullback area, that sets up a longer-term uptrend which could extend to 1340, or above, within the year.

Figure 1. Gold Continuous Daily Chart

The danger of waiting for the deeper pullback is that it may not come. If the price proceeds higher before reaching the pullback zone, the upside is missed.

Plan your trade, and trade your plan.

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