In Volatile Market Will Gold Rise to Occasion?


Simpler Trading Team

Jul 23rd 2022  .  7 min read

In this article:

  • Volume not likely to boost uptick;
  • Moving averages identify direction;
  • Gold opens “counter” trades in volatility;

Bursts of euphoric buying in recent weeks have given the broader market some interesting peaks in this bear market. But peaks can be false alarms if they lack support, as evidenced by the harsh selloff on Friday.

Simpler’s traders are looking for consistency in the equities they trade. This means looking in the right places within the market and its direction is critical.

The overall mood of the market, even at times of euphoria, impacts where and how traders at Simpler Trading find opportunities.

Market sentiment is often revealed in the charts and indicators.

All three major indexes suffered moves to the downside to end last week as this bear stock market continues to wrestle with a struggling economy, European war, calls of an extended pandemic, poor earnings reports in key sectors, and looming interest rate hikes from the Federal Reserve (Fed).

Is this market on life support until a bottom hits?

Options daily video with Sam Shames
Futures Daily Video with Neil Yeager
Fibonacci with David Starr

What does volume mean to traders?

Signs of life could begin to appear in the stock market with average buying volume. However, a lack of a catalyst for movement makes this seem a difficult venture.

Stock charts have revealed how moves to the upside have not held.

The broader market is still absorbing recent selloffs and is, in general, experiencing lower volume.

Asset trading volume, which is the number of shares traded between the daily open and close of an asset, is an important consideration for traders. 

Asset shares with a higher daily volume are considered more liquid – or active – than those with lower daily volume. When volume is low, traders find it difficult to be optimistic about assets moving higher in price.

Some traders follow the $TICK volume, or the number of changes in a contract’s price, as a surrogate for trade volume. Prices tend to change more frequently with a higher volume of trade.

With the indexes potentially firing squeezes to the downside, the prospect for bullish peaks subsides. It’s even possible the weekly time frame with micro squeezes could be translated into overhead resistance to these indices.

While a sustained gap higher would be welcome, Simpler’s traders aren’t finding ample opportunities to the upside. Opportunities for short trades, however, are there.

Traders look to indicators for direction

While stock charts and indicators are a must in a bullish market, this indecisive market chop means traders adjust strategies, and indicators, accordingly.

Traders use bar charts to find the level of volume for an asset. Bar charts also allow traders to identify trends in volume. When signals on a bar chart are higher than average, traders view this as a signal of strength.

When traders want to confirm a reversal of the support, they look for high buying volume. High volume pullbacks suggest that there could be a near-term reversal. Conversely, if traders want to confirm a break in the level of support, they look for low volume from buyers.

Simpler’s traders focus on the daily charts to watch for assets to either break out in either direction – or revert to the mean (average price).

While volume reveals to traders the buying volume of an asset, the simple moving average (SMA) tells traders the average price. A simple moving average calculates the mean of a given set of prices over a specific number of days in the past – 15, 30, 100, or 200 days.

Calculating the moving average of equities allows traders to have a general reference to the price data. 

A key moving average is the daily 200-day SMA. When a trader refers to movement below the 200-day SMA, this simply means that the price is dropping below the average price for the past 200 days.

Trading below the daily 200-day SMA is where traders can find moves to the downside.

An exponential moving average (EMA) is weighted and gives greater importance to the price of a stock in more recent days.

The market is still absorbing heavy selling and there has been lower volume overall. The lower volume makes it tough to be optimistic about making a new high in the indexes.

Simpler’s traders are looking for some strength between the first and second average true range (ATR) on the daily time frame. Traders will be looking for opportunities to take advantage of these moves in the indexes.

While it doesn’t give the full view, traders pay attention to a two-hour time frame just to bring out squeeze signals that show support and resistance.

Some traders don’t trade without the squeeze. Traders like to see a “ready to go” signal indicated throughout with sell signals across the board on mid range time frames. That sets traders up for short trade opportunities. Should rebounding occur, traders will be watching the indicators for signs of a false rebound.

Each Tuesday generally reveals quite a bit of market information for traders, especially if anything recovered at the Friday close. This makes it important to follow trading rules and strategies that provide a roadmap to traders.

Gold for the long-term play?

Traders who follow gold futures know that this asset can reveal a great deal about volume and price in the market.

Commodities have a role to play in the market and traders who enter for the long-term on gold can potentially take advantage of time. As equities begin to look unfavorable, gold and other metals could be good assets to trade.

The caution is not to be too bullish and rush into gold. Yet, this could be the time to see if the equity market gives a little bit more of a pullback to see if it will give traders a place to be long (meaning a bearish trade) in gold.

Simpler’s traders are keeping this potential setup on the radar as they watch for a high-compression daily squeeze.

Gold – which is valued as a longstanding currency, commodity and investment – is useful to traders as a potential hedge during times of economic uncertainty. As more people buy gold the price goes up in line with demand.

Gold can be used to counterbalance inflation because the supply doesn’t face sudden fluctuations – as opposed to paper money which can be printed at will by governments.

Physical bullion in the form of bars or coins is always an available option for gold. However, dealer commissions, storage costs, and security can make this a less ideal option for traders.

Traders do not need to buy bullion or even trade futures to invest in gold. There are several gold exchange-traded fund (ETF) opportunities to choose from. A gold ETF allows traders to gain exposure to the price movements of gold. 

A gold ETF can offer some of the same defensive-asset-class traits as bonds. The gold ETF market is liquid with a number of means for traders to access gold and other metals. An ETF can be purchased like shares on a stock exchange.

For example, the SPDR Gold Shares (GLD) ETF is designed to the spot price of gold bullion and the fund holds 100% physical gold held in the HSBC Bank vault in London.

Other well-known ETFs are iShares Gold Trust ETF (IAU) and Invesco DB Gold ETF (DGL).

As gold and gold ETFs have the potential for tax consequences, it is wise to seek the advice of a certified tax professional when investing.

The long and short of decisions

With the back and forth moves in the market, traders are looking for more sustainable market direction.

This leaves traders trying to play both directions which is no easy feat. Simpler’s traders  have access to several tools that can help them make good strategies.
Simpler’s traders use specific indicators to quickly evaluate direction quality and strength. By making calculations that would normally have been formulated by a variety of indicators, specific indicators place revealing information directly on stock charts to simplify decision making.