A New Trade Setup for Gold as Easy as A-B-C-D
A simple but effective pattern has created a new setup for the yellow metal.
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Is it too late for traders to hop on the gold bandwagon? According to the charts, the yellow metal still has plenty of upside potential.
Gold surged to an all-time high above $2,200 in the wake of this week’s Fed meeting. On Wednesday, the Federal Open Market Committee reiterated its projection of three 25 basis point rate cuts before the end of this year.
That news sent risk assets soaring. In addition to gold, the Nasdaq Composite, the S&P 500, and the Dow Jones Industrial Average reached fresh all-time highs.
Looking at gold's chart, a simple but effective pattern has created a new trading setup. We recently used a similar pattern to project the S&P 500 to our target of 5375, and that index has moved steadily toward its target ever since.
I’m referring to an A-B-C-D pattern. It’s a simple pattern, but there are no points for style on a profit and loss statement. The goal of trading is to accumulate more gains than losses, and a good trader will use everything at their disposal to get the job done.
Here’s the breakdown of the pattern, as it applies to gold:
The A-B leg equates to a move of approximately $200. This move demonstrates that the bulls are firmly in charge.
The B-C leg pales in comparison, demonstrating that the bears have no answer for the powerful bulls. This was the bears’ chance to push back, and they failed..
If we project a move equivalent to A-B ($200) to point C, this creates an ultimate target of approximately $2,325 (blue). This would represent a gain of 155 points.
My stop is located beneath point C (red). If the price breaks below this point, a lower low will have formed, which is my signal to get out of the trade. Always plan your exits in advance.
I’ve included a preliminary target of $2,225 (blue). If that figure is reached, I’ll take profit on half the position. That target is also my cue to raise the stop to the entry point of $2,170 (green).
If the trade continues to move in my favor after reaching $2,225, I’ll trail the stop higher at my discretion. When doing this, always leave ample room for fluctuation.
Gold is a hedge against inflation. The fact that the FOMC is still planning to cut rates three times this year, despite the stickiness of CPI inflation, could serve as the catalyst for this move.
At the time of publication, Ponsi was long gold.
