I had mentioned the obvious loss of steam in Gold to go down much futher before. A huge divergence has been forming on the higher timeframes with price trying to break out to the upside various times. Last week another attempt to turn the direction of this market around has been taken.
As this monthly chart of the underlying shows, there is even on the highest of high timeframes considered for everyday-trading a not-to-be-overlooked divergence showing. It has been forming since 2013 and has consistently lead to prices losing more and more steam. Compared to the downmove from Jan 2013 to mid of the same year, new lows were accomplished but without any serious pressure to the downside.
At some point these slow-moving prices are bound to turn and at least head into correction mode. For the chart above this would mean turning up into the moving averages (balance zone) to breath. From there we don’t know which direction Gold will pick next. However, last week the missing downwards pressure has lead to hitting a buy fractal signal already, which makes the trendfollower be cautious for further long activity in this market.
It is not the first time this has happened, but every opportunity should be seized to be in a market when it tells you to be in. The signal was taken, so there is nothing to think about. Only the risk needs to be calculated appropriately to define position sizing. Then the rest of the trade is up to the market. Since Gold has just hit the breakout, it may as well be some time before we know what we can expect from it down the road.
Moving up into the balance does not follow the path of least resistance for price action. Instead it is like swimming up-river. This often ends in prices not making it through the balance zone at first try. Even though a buy fractal has been hit, the resistance area (balance zone) is just too strong. The market will breath before it continues in the new direction, or resumes the old one.
Usually the trendfollower is used to being stopped out of his position even when being invested in the right direction. Following your plan is more important than sticking to a position because you think you know you are right. At these times it is better to take small losses and re-enter the market to catch the big move that eventually presents itself.
This might very well be the case in Gold here, unless we see a change from this slowly moving price to some increase in volatility.
As always it’s important to keep your Risk Management in place, never risking more than 3% on any trade you take.
Since nobody knows what happens tomorrow, that’s the best way to go, on any trade.