Recently I’ve been watching to see if an attractive reward-to-risk scenario would line up for short entry into gold futures. The pieces are falling into place.
The purpose of the accompanying weekly chart is to illustrate how the sideways trend since June 2013 could end up acting as a long pause within a downtrend from the peak in September 2011. A symmetrical triangle has formed and volatility has diminished since March of this year (the swings within the triangle have become smaller in magnitude). This generally precedes a break higher or lower.
Gold is edging beneath the lower barrier today, increasing the probability of a breakdown. In the case of a breakdown, one technique for estimating downside potential is drawing a parallel line to the upper barrier and applying it to the first low point of the triangle (I refer to this as Zoro’s Signature). Note the dashed line on the chart.
Momentum on the daily chart (not shown) is still weakening but hasn’t fallen to oversold conditions. Meanwhile, the powerful uptrend in the dollar creates a bearish backdrop for gold.
One way to manage a short trade would be to stay short until the 20-day simple moving average turns up. This gives you a trailing stop that keeps your head out of your exit strategy. That average should settle around 1296.0 today and is sloping downward. So your risk is probably limited to around 3% or 4%; it should be similar to a short position in GLD (SPDR Gold Trust). There’s a possibility of trading in and out on the way down, going short when that average is falling and being square when it turns up (I wouldn’t advise trading the long side of the market unless you’re particularly savvy at timing short covering rallies in downtrends). And you’d watch Zoro’s Signature closely to know when it might be time to step aside.
I’ll follow up on this market in the coming weeks and months as we see how the trend evolves. Good trading, everyone.
