In response to news from central banks in Europe and the United States, stocks and gold ended the week with solid gains following big moves on Thursday and Friday. Easing has been bullish in the past, and traders have learned they should never fight the Fed. Long positions in stocks and gold are likely to benefit from the actions of the world’s central bankers.

Stock prices jump on economic news
In a holiday shortened week, SPDR S&P 500 (NYSE: SPY) gained 2.25% and PowerShares QQQ (Nasdaq: QQQ), an ETF that tracks the 100 largest Nasdaq stocks, was up 1.86%. QQQ broke through the upper edge of a trading range that has contained price action since March. Based on that range, a price target of $76.11 seems within reach, offering traders a gain of about 9.6% from Friday’s close.

Last week’s breakout came after the European Central Bank (ECB) announced that it would buy unlimited amounts of bonds, a form of quantitative easing (QE). Traders boosted stock prices around the world after the announcement on Thursday, and gains continued Friday when a weaker-than-expected U.S. employment report led to hopes that the Federal Reserve would implement its next round of QE sooner rather than later. Rather than reviewing traditional indicators this week, it seems beneficial to look at what happened when the Fed has eased in the past.

Defining QE is best left to economists, but traders can easily grasp the bullish impact with a few charts. QE has led to an increase in the amount of money the Federal Reserve is holding, which can be seen in the chart below that shows the balances member banks have on deposit with the Fed, a value that has grown at an unprecedented pace.

The details of this are interesting, but what matters to traders is the next chart:

This chart rescales both the S&P 500 (the green line) and reserve balances so they are equal in value at the official end of the recession in 2009. This is when the Fed started its QE programs, and stock prices seem to have been boosted by the Fed’s actions. Further easing, especially a simultaneous effort by banks around the world could push stocks much higher.

QE is good for gold prices
The impact of QE on gold prices is even more striking:

Again, the chart has been rescaled so that both the price of gold (the yellow line) and reserve balances are equal in value at the official end of the recession in 2009. Gold has moved almost exactly as much as the Fed’s balance sheet grew. Based on history, gold should be bought in anticipation of the Fed’s and ECB’s actions. Further easing is very likely to lead to higher gold prices.#-ad_banner-#

SPDR Gold Trust (NYSE: GLD) gained 2.6% last week, with almost all of the gains coming on Thursday and Friday. The impact of QE could overwhelm all other factors in the market and long positions in GLD should be maintained while the Fed acts.

This Week’s News
Economic news took a back seat to central bank announcements and speculation last week. Markets are likely to continue buying on bad economic reports, and unexpectedly positive reports could prompt short sell-offs. Traders are betting bad economic news shows further stimulus is needed, but consistent positive news would sideline the central banks. This week, inflation could be market-moving.

Action to Take –> Go long QQQ at $68.60. Set stop-loss to $67.80.Set price target at $76. Go long GLD at $158. Raise stop-loss to $160.41. Raise price target to $171.25, the price that marks the 61.8% retracement of the nine-month decline.

This article originally appeared on TradingAuthority.com: 

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