Declining volatility levels over much of the past month have perplexed investors due to factors such as the heightened possibility of military conflict in regions such as North Korea. The trend toward complacency by so many retail investors seems ill timed, especially given this type of fundamental catalyst, but also because of the upcoming Q3 earnings season.
It seems like a flock to safety and an accompanying increase in volatility is something that active traders and investors should seriously consider. In this article, we take a look at the state of precious metals, as this will likely be one of the primary commodity segments that will benefit should investors start to seek stability. (For further reading, see: 3 Positive Long-Term Charts for Precious Metals.)
Gold bugs had much to cheer about in early September when the price of the SPDR Gold Shares broke above a key level of resistance. Unfortunately, the breakout was short lived, and like the chart of the Volatility Index (VIX), the price of GLD has dropped back down toward the support of its long-term moving averages. While the pullback may be frustrating for the bulls, it could also be used as an opportunity to increase positions while the risk/reward setup is clearly in their favor. Active traders will likely look to place their buy orders as close to the 200-day moving average as possible and set their stop-loss orders directly below $118.55 in case the selling pressure continues for longer than anticipated. (See also: 3 Positive Chart Patterns for Precious Metals.)
Traders who want to take a broader view on trading a potential rise in precious metals may want to take a look at the chart of the ETFS Physical Precious Metals Basket Shares. Like the chart of GLD shown above, the price of GLTR peaked in early September and has been drifting toward major support levels ever since. The recent close below the combined support of the trendline and its 50-day moving average suggests that the best entry point will now be near the 200-day moving average, which is less than $1 below the current price. The lucrative risk/reward scenario suggests that precious metals could make a move higher in the not-too-distant future, and from a risk management perspective, stop-loss orders will likely be placed below $62.46 in case the downward momentum continues.
Taking a look at the long-term chart of the iShares Silver Trust, you can see that there is a well-defined symmetrical triangle pattern forming. Active traders will likely use this pattern as a sign that the long-term trend is in the process of shifting in favor of the bulls. Most will keep an eye out for a break above the upper trendline, which will confirm a reversal and likely lead to a significant uptake in buying interest. (For further reading, check out: Analyzing Chart Patterns: Triangles.)
The Bottom Line
Falling volatility and a rise in complacency on the part of retail investors are suggesting that any sort of surprise could trigger a flock toward safety. In the case of a sudden shift in sentiment, we would expect that precious metals and various other hard commodities could stand to be some of the biggest gainers. (For further reading, check out: Now Is the Time to Buy Gold and Silver.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.