Spot Gold Is Ready To Jump - But Which Way?
August 1st, 2007
I recently wrote to my trading signal clients that I didn't like the action that was unfolding with spot Gold (XAUUSD). On our open long trade I increased the trailing stop to lock in gains of +1.3% (the other half of this trade was closed for a +3.8% gain).
Why am I nervous? If there's more market risk right now, what is the best way to manage it?
Four trading days ago Gold posted a big range reversal day that opened near the high and closed near the low.
Of course these reversal days don't always deliver further rapid declines, and if spot Gold pushes above the high of the reversal day at 677, then that is a very bullish sign. But over the past year Gold has delivered three more of these reversal days, and in each case it made further fast and furious declines within four trading days.
I now have a take-profit exit at 669.0 and a trailing stop at 656.81. Spot Gold is currently trading near 667.0. Both exits will deliver profit, but it's the difference between +1.3% and +3.2% gains, which is worth having if available.
One of those exits will get hit eventually. Then what should we do?
* Spot Gold may soon head to one of two extremes. If it pushes past 677, it should go all the way to $750 or more. So I'm placing a conditional stop buy entry at 677.0. If this is entered the initial stop-loss is 656.81.
* If spot Gold plunges down from here (like it did after the May 2006 reversal day), I will enter short at 640.0 (sell-at-a-stop), with an initial stop-loss at 676.0. In Elliott wave terms, this would signal a wave 3 decline and Gold should eventually continue down to under $540.0.
* It's always dangerous to insist that the market "proves you right" and moves in the direction you anticipate. If you've read my recent article on the global spread of risk aversion, you'll know that I think Gold is heading north. But the beauty of this strategy is that I don't have to be right! Gold can leap up to over $750 or slump to under $540. I don't care - I can make further profits either way.
View the complete article, including a chart of spot Gold, showing the reversal days, and a link to the piece on global risk aversion, at www.TrendSensor.com/MarketBrief/
DISCLOSURE: Murray Nickel has a long position in spot Gold (XAUUSD).
Murray Nickel is a mathematician, statistician, and professional trend trader. He offers a free trial of trading signals for global market indexes and index ETFs, spot Forex, and spot Gold. He also mentors trend trend traders aiming to excel at trading global markets.
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