How to Trade the Gold Breakout
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Exactly one year after it failed to hold $1,900, the world’s most popular metal got its groove back.
Gold staged a monster breakout this week, soaring more than $50 an ounce over the past three days alone. But this isn’t a story that only appeals to gold bugs. In fact, stock traders could soon have the opportunity to get in on the action…
Today, I’m going to show you a couple of price targets for this critical breakout. I’ll also reveal how you could trade the gold breakout for substantial short-term gains.
First, let’s take a closer look at the charts…
On a daily chart, you can see how price and momentum began to firm earlier in late May:
Gold began to creep higher from its 2012 lows in June, posting a series of higher lows as it approached short-term resistance at $1,620. After it topped $1,620 there was no looking back. Gold might hit a speed bump here between $1,675 and $1,700. But I could see it running toward next resistance at $1,775 over the next several months.
It’s important to also note that gold’s breakout is equally important for the longer-term trend. Take a look at this 30-month chart:
When we take this wider view, you can see that gold has broken out of a much larger pattern. You can see where gold failed at $1,900 after a parabolic run-up in 2011. You should also note strong horizontal support near $1,575. Buyers showed their strength every single time gold snuck below this level over the past year, hinting that it might eventually break out to the upside.
From this longer-term view, we can guess that the top of the chart will mark resistance. If and when gold tops $1,800, I wouldn’t be surprised to see it begin to attack all-time highs.
Now that gold’s off to the races, we can look for ways to trade the breakout. Obviously, mining stocks will be your best bet. Gold miners have performed poorly relative to the metal over the past year.
However, that could soon change…
Here’s a look at the Market Vectors Gold Miners ETF (NYSE:GDX):
Here you can see a potential double-bottom near $40. Shares are now attacking resistance near $48. A breakout here could signal a much-needed turnaround for mining stocks. If gold continues to run and miners eventually follow, you should have many opportunities to take short-term gains.
In fact, a quick scan of this sector reveals quite a few names that might be ready to reverse their losing ways. Vista Gold Corp. (AMEX:VGZ) is a smaller miner that’s inching closer to a breakout at $3.30:
Of course, Vista isn’t the only miner flashing a potentially bullish chart. If gold continues its winning ways in the coming days and weeks, you should continue to scan the mining sector for favorable setups like this one. Once a few mining stocks start to go, more should follow suit.
You don’t need any special software to scan through a specific sector, either. If you’re looking to begin screening for trade setups, check out my tips for stock scans from my Monday column. If you’re new to trading, these instructions should help get you moving in the right direction.
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