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Shakeout in the XAU


When are you going to listen to me, gold boy?


Almost a month ago to the day the Philadelphia Gold & Silver Index (XAU) broke through an important level we had been watching, changing the context for that index to positive for the first time since April. At the time, I had been vocally negative on gold and gold-related stocks prior to that breakout, and even following the breakout noted the following: "The risk of adding to gold positions here is greater than the potential reward."

After the breakout, over the course of the next four weeks the XAU proceeded to move higher by 10 points, from 104 to 114, before round-tripping it back to just above 105 level where it is now. Sure, it would have been nice to have the foresight to pick up 10 points in the XAU then sell it at 114, but based on point & figure charts there simply was not a low-risk entry point available to play that move.

Now, things have changed. While I still believe that ultimately gold will succumb to the effects of asset price deflation before beginning a huge bull market run, I have no way of knowing when exactly that will take place, which is why I continue to maintain a core position in gold and silver. But does that mean those who do not have a core position should wait for some presently unknowable sign before buying gold and silver? Not necessarily.

As always, it is about risk versus reward. Right now, the XAU is showing a shakeout pattern that could present a low-risk opportunity for some to go long. I show this pattern for educational purposes only. This is not specific advice.

For review, this article covers how the pattern is formed.

Below is a chart of the XAU, which just initiated a potentially bullish shakeout pattern. Depending on how aggressive one is, the entry point for a shakeout pattern is either scale buying (in this case options as the XAU only trades options via the PHLX) as the index moves toward support (102, 100, then 94) or the traditional lower-risk entry point, a reversal from Os to Xs, which creates a stop loss with the new potential double bottom break that is formed. If the XAU remains above 104, a reversal will take place with a move to 112, and a potential double bottom sell signal would occur at 104.

(Chart courtesy Dorsey Wright)

Again, this is not advice, but simply an illustration hopefully showing why patience means everything in setting up advantageous risk/reward situations.

Position in gold and silver

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