Gold At $750? Gold At $540? Profit Either Way!

August 1st, 2007

It's one thing to let your profits run on a trade, but it's also true that it doesn't make sense to take unjustified risks with profit that's on the table. So when I wrote recently to my trading signal clients that I had concerns with what I saw unfolding in the spot Gold (XAUUSD) market it was to protect the profit on the table. On our open long trade I increased the trailing stop to lock in gains of +1.3% for the remaining portion (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.

Spot Gold recently posted a big range day that opened near the high and closed near the low.

Over the past year Gold has delivered another three of these reversal days. What happened in those instances? Well, it Was Not Nice! Further fast frantic declines within four trading days. Of course these reversal days don't always deliver further rapid declines, and if XAUUSD 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?

* 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.

* 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), opened at $648.40.

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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