Though one of the least sophisticated technical indicators, the simple-moving average (SMA) has become a useful tool for trading precious metals, particularly gold. Smoother and slower moving than the more complex exponential-moving average (EMA), the SMA flattens short-term volatility to help traders gauge trends and judge support and resistance levels over intermediate time frames.
The chart shows weekly gold futures overlaid with five- and 50-week simple moving averages. The sensitivity of the five-week moving average makes it track actual prices closely, but more importantly, the chart reveals the five-week moving average works as a key support level in periods of increasing price, and that resistance there indicates further price declines. Understanding the market’s response at the five-week moving average not only clarifies the direction of the underlying trend, it also directs traders to where to place buy, sell and stop orders to take advantage of both the dips and the rips.
Similarly, the 50-week moving average can be interpreted as a proxy for the bull market in gold, which is useful for understanding price action and planning trades. Notice the 50-week SMA has been strong support for gold during the bleakest periods of its recent history. Even after the sell-off in May 2006 and the ambiguous price action of early 2007, support at the 50-week moving average has been the base on which subsequent advances were built. Though losing the 50-week moving average could create serious doubts about the bull market in gold, even the steepest declines are merely corrective with price remaining above it.
Buying in any market involves risks, but monitoring developments in the simple moving average on these two time frames will give the savvy investor advance warning of future price action.
Joe Nicholson is an independent analyst and the resident metals specialist at www.TradingTheCharts.com. His work appears on many Web sites and he’s a contributor to “Precious Metals Monthly,” a publication of the Northwest Territorial Mint.
