Gold Will Breakout - But Which Way?

August 1st, 2007

Two days ago I wrote in my update to trading signal subscribers that I didn't like what I saw unfolding in spot Gold (XAUUSD) and increased the trailing stop to 656.81 to lock in a +1.3% gain on this portion of the trade (the other half 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.

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.

Once one of these exits gets triggered, what is the trading strategy?

* If spot Gold continues up and pushes beyond 677, it should go all the way to $750 or more. So I'm placing a conditional stop buy entry (buy-at-a-stop) at 677.0. If this is entered the stop-loss is 656.81.

* If spot Gold heads south from here then I want to be short at 640.0 (sell-at-a-stop), with an initial stop-loss at 676.0. This would mean spot Gold is entering its wave 3 decline (in Elliott wave terms) and should eventually continue down to under $540.0 before any sustained rally kicks in.

* So either way, there should still be a good move to trade and the opportunity should unfold very soon - the only unknown is "which way?" 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! I don't really care what the market serves up as 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).

Article Source: http://www.articlemonk.com

Murray Nickel is a mathematician, statistician, and professional trader. He offers a free trial of trading signals for market indexes and index ETFs, spot Forex, and spot Gold. He also mentors trend traders aiming to succeed at trading global markets.
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