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This Pattern is Signaling a Bullish Trend Reversal in This Commodity

This Pattern is Signaling a Bullish Trend Reversal in This Commodity

The Federal Reserve printing presses just got even more busy over the weekend as a dollar shortage was developing across the economy and they stand prepared to do whatever it takes. The crisis is not one, but two crises all at once. The first is a financial crisis that is already playing out similar to 2008. The other is the potential for widespread business failures even after the coronavirus is contained.

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  • In an interview with 60 Minutes over the weekend, Neel Kashkari, Minnesota Fed President said, “That’s literally what Congress has told us to do. That’s the authority that they’ve given us, to print money and provide liquidity into the financial system. And that’s how we do it. We create it electronically. And then we can also print it with the Treasury Department, print it so that you can get money outta your ATM.” His statements indicate that the Fed can create unlimited amounts of cash.

    This “dollar shortage” has created a difficult environment for gold over the past month. While still outperforming the S&P 500, it can be confusing to people who had thought that gold is a safe harbor when things get ugly. The issue is that gold is priced in US dollars and will lose value if the demand for dollars begins to surge as we saw in recent weeks. As the Fed stands at the ready to monetize any and everything, the shortage may begin to turn into an oversupply and weaken the dollar and boost gold.

    An ETF that tracks gold is SPDR Gold Trust (GLD). GLD shares are backed by physical gold and provide a way for investors to get gold’s performance without having to deal with physical storage and other issues.

    On Monday, GLD completed an important reversal pattern called a double bottom, which indicates a reversal in its recent downtrend. The March 16, 2020 low tested its November support before surging higher throughout the day to close near the high of the session. That support level near $137.50 was again tested on Thursday, March 19, edged higher on Friday, and the broke out on Monday. The price testing the support on two occasions defines the double bottom portion of the pattern. The confirmation is a close above the intervening high, that occurred on March 17, on above average volume.  This pattern provides a projected target equal to the range of $8.50 added to the resistance level near $146.

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  • Based on the pattern, the near-term projection for GLD is $154.50, but a retest of the March highs near $159 is reasonable.

    Option traders might want to consider a 17 APR 20 146/147 long call vertical for around $0.50 or less. This provides a max gain of $50 a contract or 100% return if the stock closes above 147 at expiration. Consider closing early for $80 or more.

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