Using Trend Lines to Spot an Opportunity in Gold

Simplicity is always the key to success.

Sometimes, all it takes is drawing lines on a chart. 

In fact, it helped us catch another one of gold’s most profitable moves. 

For example, on May 17, 2017, we drew our trend lines on a gold chart, connecting the higher lows and higher highs since the beginning of March 2017.  It highlighted our support and resistance points in a sustainable up trend. 

While some – including fundamental traders -- would argue that drawing lines on a chart is unreliable, we beg to differ.  As long as those support and resistance points remained intact, the uptrend was likely to last, which it did.

Better yet, relative strength (RSI), MACD and Williams’ %R all agreed gold was overbought and oversold at the exact point resistance and support lines were tested.

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In fact, here’s the chart we drew our original trend lines on.

Here’s what happened shortly after.  As you can see gold ran from a low of $1,220 to $1,300.  Any one trading that simple set up made a good deal of money.  As of June 2017, though, we had to wait to see if the trend could continue, as traders feared pullbacks on rate hikes from the Federal Reserve.

Even broken trend lines have helped us spot opportunity.

Look at the US Dollar for example.  Once the support line was broken in May 2017, any one that went short the currency or bought a bearish dollar ETF stood to do quite well.  While we could make an argument for oversold conditions using MACD and RSI, we also had to consider that prior support around $97.50 was now probable resistance.

For us to now technically argue for a new push higher in the US dollar, we would need to see a break above $97.50.

While I’m sure most of you already use trend lines, here are some pointers for those that are new to using them.

No. 1 – Connect the lows (two or more).  Connect the highs (two or more).  We’re attempting to define a sustainable pattern, and carve out potential opportunity, as we highlighted with gold and the dollar above.

No. 2 – You must use two more highs/lows to see trend lines.  Less than that shows nothing.  And sometimes, the more the better.  That’s because it helps us see longer-term trends, as well.  It can also tell us exactly when to buy (at support) or sell (at resistance) in a powerful, sustainable trend.

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