The Paragon Futures Report
Gold Trade Setup Review
By Brian D. Green
Brian D. Green is Chief Market Strategist of Paragon Futures Group, Inc. and Navis Capital Management, Inc., an introducing broker and Commodity Trading Advisor based in Powell, OH. Paragon Futures Group, Inc. specializes in financial futures while Navis Capital Management, Inc. produces The Paragon Reports, a daily advisory service for S&P, Nasdaq and T-Bonds traders, and manages customer accounts. The firms' clientele includes institutions, hedge funds, floor traders and individuals located throughout the world.
Gold has been in a sustained downtrend for years with a breakdown below key support of 300.00 in March 2000. Since that breakdown the December 2001 contract has traded lower to 260.00 in early April 2001. A spike test up to 301.80 on May 21 set up a two-week move lower to 268.00 on June 5. So where does the "yellow metal" go from here?
Since the June 5 low the market has consolidated between 281.50 and a new low of 267.00 in early July. Late July saw retests to 267.30 with the consolidation narrowing to 267.30-274.60. The lowest and highest closes in this 21-day range are at 267.60 and 273.30. The 274.60 level is also key, being the recent 20-day intraday high. During this range, four days produced NR7 compression patterns, a prelude to a significant move. The break finally transpired in August with the technicals having favored the upside move. The following information summarizes the setup pattern.
First, on the weekly chart the price action was setting a series of higher lows with a potential bottoming pattern between February and April, with the April low "cleaning out" the stops below the February low. Note that recent selloffs were holding 3-4 points above these lows. Second, the August 3 close at 270.80 broke a trendline from the June 26 to July 19 highs. This action held despite other significant selloffs in metals, especially silver. September silver broke to 411.50 on August 07, 4.00 pts below the last extreme low for the front-month contract at 415.50 set in mid Jul 1997. This action cleaned out the remaining longs in that market. Gold refused to follow lower, a positive divergence. A close above 273.30 would be a signal of an impending break higher with a move above the 274.60 level triggering buying interest. Both of these factors were satisfied on August 09 with a break higher producing a move to 276.60 with follow through in subsequent days to 280.20. Once again the bulls held their ground in the yellow metal while others broke lower on August 10. The next significant high closes above the market are at 278.30 and 279.00 set in mid-March and June.
The initial upside breakout target at 279-284 is currently being tested. A close above 279.00 sets in motion a retest of the May highs at 290-300. Note that a close above 291.20 would potentially signal the beginning of a sustained move ultimately leading to a closing break of 300.00. In early August we stated that aggressive traders should look to buy a partial position on the August 3 closing trendline break and add to the position on a close above 273.30. These parameters have been met and the initial protective stop must be 260 intraday and 267 close only. Note that these are relatively wide risk parameters. However, given the potential 15-20 points move from current levels, they offer a reasonable risk-reward ratio. Traders that are not already long should look for a pullback to the 272-274 area for a long entry using the same protective stops. Ultimately, traders should be looking for a test to the 290-300 zone.
Trading breakouts can be a very profitable endeavor. But, of course, there are numerous methods to trade all the instruments available. Each is applicable to specific situations. Depending on the trader's account size and risk tolerance, he/she may consider long call options, an options spread or an outright futures position to capitalize on such a move. As with all trades, strict money management should be employed. A close below 267.00 would be an early warning sign of a failure. Breakout trading typically provides the lion's share of most trading programs as these situations set up large moves. It is another technique that all traders should keep in their toolbox and is applicable on timeframes from minute charts to monthly and yearly charts. Please visit or website or give us a call about trading this setup or any of our other advisory or brokerage services.