Spot Gold Is Ready To Jump - 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.

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.

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.

OK, so one of these exits will be hit. Then what?

* 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 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.

* 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 holds a long position in spot Gold (XAUUSD), opened at $648.40.

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