Reviewing Retracement Strategies in Power Trending Gold

Jul 13, 2011: 12:45 PM CST

So far, there’s been no stopping the bullish power trend in gold, but that doesn’t mean you should rush out and put on an aggressive gold position just because price continues to rise steadily.

Let’s do a quick review of a simple retracement strategy you can use to minimize risk and maximize opportunities in the context of this rising trend so long as it persists.

First, the “Bigger Picture” Weekly Intermediate (and Long-Term) Trend:

As a reference, review some of my prior posts on Retracement Logic/Examples for additional insights:

Trading Retracements and Breakouts in High-Flying WYNN

“Simple Trading Lessons from NFLX Doubling in Price”

The main idea is to identify a confirmed trend and then trade (buy) simple retracements to rising trendlines or key moving averages – doing so allows you to manage risk more appropriately, placing a stop just under the expected inflection price.

In the context of a power-rising trend, there are two main (simple) buy-in strategies:

1.  Retracements to Rising EMAs or Trendlines

2.  Breakouts from Recent Consolidation/Prior Highs

We’ll focus mainly on retracements to the rising 20 week EMA in the chart above for simplicity.

I’ll let the chart speak for itself rather than describe each event separately – they’re all the same in logic.

I highlighted the prior retracement entries (either to the 20 or 50 week EMA) accordingly in Green, and then labeled the breakouts (either from a falling ‘flag’ trendline or above a prior resistance high) in Yellow.

We’re on the cusp of another potential breakout signal this week in gold, after successfully rising from a weekly EMA buy signal at $1,480.

Any firm break of the rising trend invalidates the current bullish structure, but until then, the best trades continue to be made in the direction of the longer-term rising trend.

That’s the Weekly Picture – here’s the shorter-term Daily Chart for smaller buy-ins:

In general, longer-term position traders or investors use weekly charts for multi-month holding periods, while shorter term traders (both swing and day traders) reference the Daily Chart (or intraday charts) in the context of the longer-term trend.

You can see the same type of “buy retracements to rising EMAs or Trendlines” logic in the Daily Chart with similar Green (retracement) and Yellow (Breakout) notation.

Let me call your attention to January and late June 2011 when price broke the Daily EMAs only to reverse quickly the following month.  What gives?

Again, go back to the Weekly Chart above to see that both of these ‘deep’ daily pullbacks were just retracements to the rising 20 week EMA – a classic/low-risk buying opportunity for higher-timeframe players.

Knowing this – or at least anticipating a potential bounce from the weekly structure – may have prevented you from rushing out to short-sell gold for a bearish play.

Those events are lessons in themselves of the importance of combining two timeframes in power trends.

By combining two timeframes like this, you can avoid some of the “Bear” or “Bull” Traps that occur on Daily Charts.

I added Red highlights to indicate “pokes” outside the upper Bollinger Band which served as short-term “Take Profit” signals from prior retracement trades.

Again, reference the prior posts above for additional information, but for the example of gold, I’ll let the charts speak for themselves.

There’s ways to add to your analysis (such as using Fibonacci, Reversal Candles, etc) but sometimes it helps to cut out the complex information and focus on the simple chart picture and then build from there.

Gold gives us many examples of retracement-style logic in the context of a multi-year power-bull trend.

Corey Rosenbloom, CMT
Afraid to Trade.com

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4 Comments

4 Responses to “Reviewing Retracement Strategies in Power Trending Gold”

  1. Dominick Says:

    Hello Corey, did those pullbacks on the daily chart to the weekly 20 ema exhibit divergence on the 3/10?

  2. Corey Rosenbloom, CMT Says:

    Dominick,

    That's an excellent question – it's one way to add to the confidence in taking a higher timeframe retracement set-up like this.

    No, the daily chart did not show 3/10 Oscillator Divergences into the Weekly EMA support which was tricky – it certainly would have been nice if that were the case.

    I checked and there were clean/clear obvious positive divergences (including multi-swing divergences in June 2011) in both cases, though the pullback in January was more severe (less divergent on the lower/intraday frames).

  3. Dominick Says:

    Thanks for the response and the these great posts. Enjoy the weekend.

  4. Wednesdays with Wyckoff: Trading Rules | Afraid to Trade.com Blog Says:

    […] a powerful trend in motion (think gold) may cost you your trading career – or at least result in considerable […]