Gold Will Breakout - 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).

Here I'll explain why I'm a bit nervous and outline a trading strategy for managing risk at this time.

Gold recently delivered a bearish reversal day: a big range day that opened near the high and closed near the low.

There have been three more of these reversal days during the past year, and in each case XAUUSD made further fast and significant declines within four trading days. 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.

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.

* If you've read my recent article on the global spread of risk aversion, you'll know that I think Gold is heading north. A key to successful trading is not to focus on being right, but on how to make a profit given how the market is unfolding. In this case, I don't have to be right. I don't care which way Gold jumps. Either way, there should still be a good move to trade and the opportunity should unfold very soon. The beauty of this strategy is that I can make further profits whichever way the Gold market decides to jump.

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 holds a long position in spot Gold (XAUUSD).

Murray Nickel is a mathematician, statistician, and professional 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 traders aiming to build consistent success at trading global markets.
This article is available as a unique content article with free reprint rights.

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