On February 4, I walked through a few charts that showed why it was time to buy Gold ETFs (or any other form of gold).
In the four trading days since that previous blog post, SPDR Gold Trust ($GLD), a popular ETF proxy for the spot gold commodity, has cruised 4% higher.
The S&P 500 and NASDAQ Composite indices tumbled 3.2% and 5.2% respectively during the same period, which is a great example of why it pays to trade ETFs with a low correlation to the direction of the stock market when equity sentiment turns bearish.
Since gold is often viewed as a “flight to safety” play when stocks are weak, it’s likely that bullish momentum in $GLD will continue in the near to intermediate-term.
But even better is that strength in $GLD is now backed by weakness in the US Dollar, which has created another new buying opportunity in the Japanese Yen ETF ($FXY).
Here’s why it’s time to buy $FXY (and $GLD on a pullback)…
One of the most reliable charts to monitor when trading gold ETFs, spot gold futures, or even physical gold coins, is the US Dollar Index ETF ($UUP).
As with everything else in the stock market, there are exceptions to the rule, but I have found that gold typically strengthens as the US dollar weakens (and vice versa).
It’s an inverse correlation, just as we have seen between the direction of stocks and spot gold over the past week, but even more accurate most of the time.
As such, let’s take a look at the weekly chart of $UUP to see one more reason why we remain bullish on gold right now:
The recently established “lower high” and “lower low” (shown above), combined with the break of key moving average support, tells us the longer-term uptrend in $UUP may be over.
Specifically, last week’s selling and this weeks continuation lower has put $UUP below the 10, 40, and 60-week moving averages for the first time in nearly two years.
With both the 10 and 40-week moving averages now turning lower, $UUP is vulnerable to further selling in the coming weeks (and months).
Continued bearish momentum in the US dollar ETF would likely force the 10-week moving average to cross below the 40-week moving average as well, which would produce another bearish trend reversal signal — and that’s good news for Gold bulls.
Although we already have an unrealized gain of 6.3% since buying $GLD in our swing trading newsletter (on January 27), the technicals indicate there may be substantially more upside to come, so pullbacks in gold are relatively low-risk buying opportunities.
Weakening Dollar, Strengthening Yen
In addition to Gold ETFs, select foreign currency ETFs are also benefiting from newfound weakness in the US dollar.
One such example can be found in the recent breakout of the Japanese Yen ETF ($FXY), which is shown on the weekly chart below:
While $UUP broke down below key support levels over the past two weeks, $FXY conversely broke out above resistance to a new 5-month high and has formed another “higher high”and “higher low.”
With the 10-week moving average crossing above the 40-week average, and both averages now pointing upwards, bullish momentum is clearly picking up in the Japanese Yen ETF.
Although low-risk buying opportunities in the stock market may be hard to find in the current environment, solid buying opportunities remain in certain ETFs with a low correlation to stock market direction (such as precious metal and select foreign currency ETFs).
Don’t Follow The Crowd
Until Chinese stocks and the crude oil markets start to find some traction, US equities are likely to remain weak overall.
Given the lack of market leadership in top stocks right now, it’s fair to say that any rally in the market is likely to be a short-lived bounce (and eventually shortable).
But as I said before, that does not mean there is a complete lack of profitable trading opportunities on the long side.
Rather, you just need to look outside of stocks that everyone else is struggling to profit from, and instead dive into the world of trading ETFs such as $GLD and $FXY.
If you need help with this, just sign up for your risk-free trial subscription to The Wagner Daily newsletter and we’ll do the heavy lifting to find the best low-risk buying opportunities in this challenging stock market (just as we did for subscribers who bought $GLD before the strength in gold started to become obvious).
What do you think about the state of the market lately? Share your thoughts with the world by dropping us a comment below.