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The Carnage Continues in Gold Prices, and You Have 3 Choices

The Carnage Continues in Gold Prices, and You Have 3 Choices

2015-11-17 21:01:00
James Stanley, Strategist
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Talking Points:

  • Gold Technical Strategy: Flat. Treading lightly moving forward.
  • Gold has moved lower by 10% in the past month since topping out on 10-15, and has thrashed through every pertinent support level leaving prices back near the July lows.
  • Selling here can be daunting given the lack of attractive risk management levels, and longs can be difficult given the veracity of the up-trend. Again, tread lightly moving forward here.

Gold is in the midst of a profound run: The yellow metal has shed over 10% in a little over a month. Twenty-one of the last 24 trading days have seen Gold prices move lower. After we hit the $1,190 threshold on October 15th, the world has not been kind to Gold bugs. Rampant Dollar strength coupled with an extremely bearish tone in Gold markets around the world has helped to drive the metal to a new five-year low, set this morning after the break of the July low at $1,071.28.

This leaves traders in a precarious position with current price action. The options are simple, the solution not as much. Traders can utilize one of three options here, each of which we’ll discuss in this article.

1. Chase the down-trend. This can be troubling given the lack of any nearby resistance, and the fact that we’ve already put in an out-sized run to the down-side. Also complicating matters is the lack of any nearby support, as we haven’t been in this region of price action for nearly five years. There may be a support level using a projected trend-line, but outside of that, we have to extrapolate based on psychological levels that haven’t been ‘in-play’ for quite some time.

2. Play a reversal; but given the veracity of this down-trend, that prospect can be extremely daunting. This should only be tried by the most grizzled of reversal-traders. There is a true art to this style of trading and it definitely isn’t for everyone. To be efficient at trading reversals, one often needs to use tight stops with strong profit management and a level of resolve that, frankly, isn’t in every person. You may need to take three or four swings to catch a reversal that ‘works,’ if it works at all. And sometimes you just have to abandon the setup and look for greener pastures elsewhere.

3. Wait. This is often an overlooked option by traders, especially new ones. But cash is a position, too, and when markets are at the top or bottom of a move, well that’s when their often least efficient. Many professional traders will just wait this out, let the down-trend further substantiate itself or, at the very least, let price action congest for a bit to let a more actionable setup present itself. Something like selling resistance at an old support level can be a very operable way of instituting this logic.

Personally, I’m in camp #3. But I know you’re probably not reading this article to hear some guy tell you that he is standing aside for a more clear setup to present itself. So I’m going to show you the most efficient manner of instituting each of the three approaches or strategies listed above.

For those looking to chase the down-trend, stops can be set just above $1,100 as this was the swing-high from yesterday, and also gave us a resistance hit off of a projected trend-line that can be found by connecting the June 2006 low to the November 2008 low, and then following it forward. This trend-line is applied on the below chart in purple. Perhaps more interestingly, this had helped to mark those July lows, and yesterday’s price action saw reistance come off of this old support level.

This would be a $30 stop, which is rather wide on Gold. To offset this, traders would likely want to look for that $1,000 level to come into play in order to justify such a wide stop. But if you’re really bearish on Gold, $1,000 could be attainable, especially if the Fed does actually hike in December. After all, that’s the big differentiator since October 15th when this run really started.

Alternatively, for those that want to trade the reversal, stop management will be a bit easier given the recent lows, but you would very much be going against the grain given the +10% dip that we’ve seen over the last 32 days. But again, traders going for this play may need to make three or four attempts before actually catching a strong reversal, so risk-reward needs to be even more attractive to justify the entry.

Today’s low came in at $1,065, and with current prices at ~$1,070, that would equate to a roughly $6 stop to get risk levels below today’s low. With that, prices moving back up to previous support of $1,087.05 could almost clear a 1-to-3 risk-to-reward ratio. But if we can get back to that previous swing-high from yesterday at $1,098, that could offer a 1-to-4.67 risk-reward ratio, and that could be considerably more attractive for a reversal setup.

To wait, traders need only a plan in mind. For me, I’m waiting for a new low to get printed to prove that sellers can continue taking control, and should we find resistance off an old support value, I’ll get an entry. Alternatively, I can wait for prices to bounce back to the previous support level at $1,087, and look to trigger the short then.

The Carnage Continues in Gold Prices, and You Have 3 Choices

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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