Gold has had a huge rally today, exploding into new contract highs. Pattern watchers could have recognized the setup that led to this move today; breakout traders could profit from this move. (For more on breakout trading, get my book here.)
Below is the daily chart for December gold futures. The green arrow is pointing at yesterday’s bar. It was an inside day and doji; it also had the narrowest trading range of the previous seven sessions. All these patterns paint a picture of a market at a short term equilibrium point – a market poised for a breakout move and trend day.
Breakout setup, then a trend day
Some other things to note about the daily chart: The blue horizontal arrow is drawn at Tuesday’s high. This was the primary level to watch for an upside breakout. I drew a short trend line connecting the past two day’s lows; I watched that for a downside breakout point. I also drew a trend line connecting Tuesday’s low to yesterday’s high; this gave me a rally objective. The bottom panel of the chart shows the 2 period ROC, it was on a buy signal for today (I don’t trade Taylor Technique signals on breakout days, but it’s still worth noting.)
Next is a 15 minute chart. The blue horizontal line was Tuesday’s low – the reference point for an upside breakout. After it was broken it went back to try to test that point; the inability to reach the breakout point was an indication of the market’s strength.
One way market today
On a breakout day, we anticipate a trend day; that the market’s dominant characteristic will be to trend in the direction of the breakout. If we’re looking to trade a trend day, we want to find entries in the direction of the trend, not to try to pick tops or bottoms. This runs counter to what we often are trying to do with the Taylor Technique, which seeks to identify short term trend changes.
On trend days there generally won’t be trend changes; we look for pauses or corrections in the dominant trend for entries. On today’s chart, there were a number of small flags or retracements to the 20 period EMA for entries, but that’s really a topic for another article.
One last note, on picking profit targets. Look at the green trend line I drew on the daily chart, connecting Tuesday’s low to yesterday’s high. I’ve found this two day low-to-high trend line can be valuable for finding profit targets when there are no other obvious points on the charts. Similar lines can be drawn from one day’s high to the next day’s low, or two day’s highs or lows, depending on the market’s structure. These 2 bar trend lines often serve as support and resistance for a market.
Happy Thanksgiving!
This is a sample of the analysis from my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
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