Markets have been jittery and volatile over the past month. Mid-April saw the S&P 500 tumble back toward the 1,800 level before recovering to higher levels. Crude oil has been swinging higher and lower between roughly $98-$104 barrel and gold prices have largely traded within a $1,331-$1,268 per ounce range over the last month.
There are plenty of events to keep traders on their toes—from the continuing unrest in the Ukraine, to the movements in Federal Reserve monetary policy, and new updates on the actual strength of the U.S. economy. There are always fundamental backdrops and influences that will drive markets and there is always the risk of a "black swan" event, some variable that is unexpected and not predicted.
So, what is a gold investor to do amid all the noise, volatility and choppy trade? Have a plan. Keep a cool head.
Know your timeframe. Are you a short-term gold futures trader —swing trading the market on a multi-day basis? Or, are you a longer-term gold investor—holding physical gold with a longer time horizon. Maybe you do both. But, it is important to delineate your portfolio—break it down—this amount for short-term trading, versus that amount for long-term investing.
Heightened volatility and fast-moving markets can trigger a physiological response in traders—a survival tactic—called the "fight or flight" response. This is a documented physical response that occurs in humans during times of fear, extreme uncertainty, shock and stress. Traders need to be aware of this physical reaction and have a plan in advance to overcome the mental paralysis that can occur after a stressful market event. When the fight or flight response is triggered, the body is channeling energy away from the pre-frontal cortex, (the analytical part of the brain) and the limbic system (the most primitive part of our brain) takes over and prepares the body physically to deal with a potential threat.
Since market events generally aren’t life threatening (though they can feel that way), traders need to switch off the body’s survival response when stressful market conditions occur. Psychologists say deep breathing can help signal to the brain that the threat is dissipating, which can help recharge a trader’s analytical part of the brain. Also, having a written plan is an important factor in successful trading and investing.
Are you looking to build up a portfolio of gold for the longer-term? Are you looking to add to your current holdings on price dips? Write down the levels you are monitoring—what support zones do you see ahead? If gold falls to XYZ level, how much will you buy? Write it all down. Have a plan. Then, in the moment—you have step-by-step instructions —from yourself — to follow. Are you trading gold futures? Again, what is your timeframe? Identify the price levels that you are monitoring and then plan your trade and trade your plan.
Gold prices had a great first quarter—with Comex June gold soaring to $1,392.20 from $1,186.70. But, the past six to seven weeks have seen a corrective tone grip the gold market, with the retreat to the April low at $1,268.40. That remains strong chart support for the market near term and it roughly coincides with a 61.8% Fibonacci retracement of the January-March rally move. That is a key line in the sand. As long as that zone holds firm the April sell-off can be considered corrective to the larger move. If that floor were to crack in the days ahead, it would open the door to a more substantial decline. But, eager buyers have been scooping up gold on dips in recent days.
The near term trend is choppy and volatile. It is not a strongly trending market. But, gold bulls are fighting back on dips. This is a market for quick short-term scalps. Short-term traders would be well advised to take their profits quickly. Once a clear trend emerges for the short-term, then trend following positions can be set.
On the upside, short-term resistance lies at $1,306.60 and then $1,331.40, recent swing highs on the daily chart—seen on Figure 1 below. Sustained gains above $1,331.40 would improve the near term technical outlook. Sustained gains above $1,331.40 would show the bulls are back in charge of the near-term trend.
Bottom line? The near-term outlook for gold is cloudy. Watch support and resistance. Plan your trades. Those investors who plot out their plan of action ahead of time will be better able to maintain a cool head and take advantage of opportunity when it arises.
Kira Brecht is managing editor at TraderPlanet.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.