Gold At $750? Gold At $540? Profit Either 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.

Spot Gold recently posted 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.

The spot Gold market is currently trading near 667.0. I have exits above and below, at 669.0 and 656.81. Both exits will deliver profit, but the 669.0 exit I've just added is the difference between +3.2% and +1.3% gains, which is worth having if available. On an hourly chart of XAUUSD it looks like it should push to at least 669, but no market comes with guarantees included.

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 plummets from here (like it did in May 2006, after a reversal day), then I want to be short at 640.0 (sell-at-a-stop), with a stop-loss at 676.0. This would suggest spot Gold is entering its wave 3 decline (in Elliott wave terms) and 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 has a long position in spot Gold (XAUUSD).

Article Source: http://mylilpeanut.com

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.
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