Before I begin, I want to clarify that I am no “Gold Bug” nor
am I in Mark Faber camp to expect Gold to outperform every other asset
class in 2015. I simply study Charts and when they are trying to tell me
something I listen. So what are they saying to me now.....read on.
The daily chart of $GLD, below, is showcasing a classic
inverse head and shoulders pattern with the neck line at $118. On 12th
Jan, $GLD prices were flirting with the neckline level for 3 days with a final blowout
happening on 15th Jan on above average volume – triggering a buy
signal.
I didn’t like the long tail on the daily candle @ close on
15th Jan which is why I waited another day. 16th Jan was
no different & my skepticism had not completely vanished. Today, I finally pulled the trigger knowing
that there is strong momentum behind this breakout with further still room to the upside. The upside target for an inverse head and shoulders
pattern is to look at the distance between the head and the baseline ($10 in
this case) and add that to the neckline. So the approximate target for $GLD is $118 + $10 = $128.
TRADE
Bought $116 Calls for Feb 20th Expiration @ $8
each ($GLD @ 123.7)
Profit Target: $GLD @ $128
Stop Loss: $GLD below $121 (I will keep moving my Stop Loss up if stock keeps rallying)
WARNING: One reason why I am not in love with this
pattern is because it’s contrarian to the strong downtrend in $GLD, see
weekly chart below, that has been in play for a long time now. Absent this pattern, this would be an excellent short
point for $GLD – which speaks to the complexity in interpreting charts. In order to address this risk, I have the stop loss in play & I will not interfere with it.
One thing I’ve learned over the years is that it’s not good chart
skills that make you money, but it’s applying proper risk management “all the
time without any exceptions”. Good traders should never be judged purely on
their returns (sadly the industry looks at Sharpe Ratio as the key performance
indicator) but instead look at “Risk Adjusted Returns” that take into account the
extend & duration of maximum drawdown with respect to the returns (also
known as Calmar Ratio). My next article will focus more on Risk Management
Principles.
If you found this article useful
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Happy Trading!!
