Gold. Gaps. Golly–gee–whiz.

091124gldStock investors are now looking at something in GLD that futures traders are long familiar with — repeated gaps.  These rarely occur in stocks, but are common in commodity blow-off situations. (See SLV and PGM also.)

Here we have a breakaway gap followed by a power bar (!) followed by two runaway gaps.  Well, obviously there must be some cook book which tells you what to do when this occurs.  Not.

What we know is that markets which go parabolic eventually collapse.  So there will be a collapse, but when and how big only talking heads and pundits know.  People who actually trade these markets have no idea.

We do know how to handle the market though.  The method that always wins over the long term is to  wait until a trend reversal is signaled.  One way to do this is to use Magee’s New Highs Basing  Point procedure, variant 2.  That is, take the low of the latest high and set a stop 5% below it.

For the preternaturally skilled there might be reversal behavior at the top which signals a change.  Unfortunately exiting prematurely can be costly.  In the Hunt silver market of the ’70s we made a fortune by exiting early — against our system rules.  Stupidly we gave up a fortune on the rest of the market.

Buy strength, sell weakness.

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This Post Has 2 Comments

  1. sean.reynar@rbc.com

    What would be your stop price in the current gold situation?

  2. WHC Bassetti

    Regret I only just saw this (Friday night). Several days ago I pointed out that taking the low of a new high day and using a 2% filter could be an effective way to get out. I assume (hope) you saw that post.
    See tight progressive stops in 9th edition page 438.

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