Previous Price Action
The price of gold has been trading in a sideways trading range for the last few months, struggling to break decisively above or below the $1200 level.
This can be seen in the chart below because you can see that the price has been trending within the upper and lower trendlines for many weeks now.
It seemed that there needed to be a catalyst to move the price strongly upwards or downwards to break out of this range, and last week’s stock market mini-crash provided this catalyst.
Safe Haven
In times of uncertainty, people often sell some of their stocks to preserve their capital and invest it into something a little safer and less risky, and gold is often seen as a perfect safe haven for this cash.
Therefore it was no surprise at all that the price of gold surged higher last week after the big sell-off because this happens fairly regularly.
As a result of this increased buying, the price of gold broke upwards out of this trading range, and is currently trading at $1232 at the time of writing.
Trading Opportunity
If you are someone who likes to trade price breakouts, you probably would have entered a long position at the close of the breakout candle, and would now be in profit slightly because the price has continued edging higher at the start of the London session.
Indeed the breakout candle closed at $1223, so this breakout trade is already $9 in profit at the time of writing.
I myself didn’t really like the look of this breakout because there was a very large breakout candle, and when this happens you will often get quite a large pull-back, and are then sitting on a loss, and sometimes the breakout quickly runs out of momentum.
Furthermore, I thought that there may be limited upside from here because the EMA (200) currently stands at $1245, which is likely to act as a strong resistance level.
There are some breakouts that look ripe for a trade, and others that are a little unconvincing, and I would say that this latest gold breakout is still a little unconvincing, which is why I will not be trading this breakout at any point, even after it broke higher today.
The reason why I say that is because we have already seen a slight recovery in the stock market, and there seems to be a little support right now that is holding the price of the major US markets up.
So if the markets do happen to bounce back this week, which could happen, this will likely have the opposite effect on gold, and the price may well fall back within in the previous trading range.
This has turned out to be a good breakout trade for those that had the courage to trade it, particularly if they have already moved their stop loss up to break-even because it is now a risk-free trade, but I never really felt that this was a high probability set-up.
I am prepared to wait for high probability set-ups where the odds of success are much higher. The price of gold could easily touch the EMA (200) and possibly break through it, but it’s no problem at all if this occurs. It’s just something you have to accept as a trader.
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