Contrarian Alert: GOLD Trade Offers Attractive Risk/Reward

Investors ran for cover last week after the bulls’ confidence was rattled by the Fed, which hinted at scaling back on their bond-repurchases earlier than many were anticipating. Profit-taking pressures hit equity markets overseas and at home as fading stimulus hopes prompted a sell-off ahead of the prolonged holiday weekend for Wall Street; nonetheless, investors appear to be back on the scene in a bargain buying mood as major U.S. indexes have managed to snap back and appear to be well on their way to resuming the uptrend at hand [for more commodity futures news and analysis subscribe to our free newsletter].

Gold prices and producers of the yellow metal remain severely depressed as momentum has failed to return to the precious metals market following the steep sell-off seen earlier in April. Contrarian investors should add Randgold Resources (GOLD) to their watchlist because this mining behemoth is resting on major historical support, thereby offering an attractive entry point for those eager to establish exposure to the gold miners space while prices are still beat down.

Chart Analysis

Consider GOLD’s 5-year daily performance chart below. From a long-term technical perspective, GOLD is currently in a sweet spot as it is trading right along a major support level; notice how this gold mining stock has managed to rebound off the $70 level (green line) on several occasions over the last few years. What’s even more noteworthy is the fact that after each instance of re-testing $70 a share, this stock has managed to turn in a strong rebound usually spanning several months.

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Entering into a long position at current levels offer an attractive risk/reward ratio seeing as how traders can set a tight stop-loss near the recent lows, while still favorably positioning themselves in anticipation of a big rebound [see 5 Commodity Trading Mistakes You Could Be Making].

Consider GOLD’s one-year daily performance chart below. It’s encouraging to see that this stock has managed to post higher-lows (blue line) since bottoming out at $66.51 a share on 4/17, further adding weight to the long-term bullish opportunity at hand.

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Despite its steeply discounted price, GOLD is still a very risky bet seeing as how the price of the precious yellow metal has yet to fully stabilize; furthermore, this stock remains in a downtrend given that it has consistently posted lower-highs (red line) since peaking at $127.27 a share.

Outlook

Traders looking to get long should utilize a tight stop-loss order in case selling pressures unexpectedly return to this beat down stock; in terms of downside, GOLD has major support around $70 a share. If GOLD does rebound for good, profit-taking pressures could resurface as it nears $80 a share, given that it struggled to conquer this level in late April of this year. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.

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Disclosure: No positions at time of writing

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