Gold futures have seen a big selloff in November as the US Dollar Has strengthened and traders have priced in an increasingly tighter Fed policy for 2017. Over the past weeks I have spoken to a number of clients about buying gold; it has seemed like every time we decide to wait it has been cheaper the next time we talk.
For today there were a number of signs to tell us to anticipate a selloff. Identifying these signs could have given you a good breakout short for today; at the least they gave you a warning to wait to be a buyer if you were looking to do so.
The biggest sign was the markets down trend. If you are looking to go long a market, it pays to be especially careful about long entries (if you take them at all) and to not overstay longs if you choose to take them. “The trend is your friend” is good trading advice; it is especially important in a highly leveraged market like the futures.
Narrowing our look to this week, last Friday gold made a new low for the move. It then spent two days flagging, showing small trading ranges and a doji bar on Tuesday. These patterns told us to anticipate a breakout move (but didn’t tell us which direction to anticipate).
Normally I suggest that traders keep a neutral stance as to the direction of breakout moves, as we can usually let the market decide which way it wants to go; we just identify the setup and then go with a trade when the market moves out of the identifying setup. In this case, however, I was shading to the short side (or at least not buying before the breakout move occurred).
There were two reasons for this. First, the market was in a down trend. Second, it was holding just above the psychologically significant $1200 level. IF we were looking to go long, we could either wait for an upside breakout of the channel or wait for the market to successfully test the $1200 level- something like a short term break below and then a recovery back above $1200. A held move below $1200 was likely to lead to a bigger selloff.
Gold spent much of the night trading within Wednesday’s range. Shortly after 7:20 AM it fell below the Wednesday low (the first downside breakout level) and then a few minutes later it took out last Friday’s low and $1200. This was the second, and more conservative entry area for a breakout short sale.
The rest of the morning showed how we let the market tell us what to do. If we shorted the breakout, the continuation of the selloff told us to stay short. If we had been looking to buy, the fact that it couldn’t regain $1200, along with the series highs, told us to wait to buy.
I’m normally not one to pick a price to take profits on a trade. To me, picking exit targets is analogous to picking prices at which a trend will change, which is usually difficult (exits are usually the most difficult thing about trading. However, it is interesting to note that if you used the width of the channel as a measuring objective, that level was 1181.70, .50 off today’s low.
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