The set-up: Gold, as represented by the SPDR Gold Shares (GLD), has had solid resistance for months now, just a straight line that you can easily see on the charts, and Monday it had a flat-top breakout, finally breaking through the ceiling after a long-term consolidation period.
When I see this kind of significant breakout, the only indicator I look for to confirm it is volume expansion, and – as the chart shows – that is exactly what we saw on Monday.
The upside: When I see a breakout in a security that has been cycling this hard back and forth between consistent resistance and support levels, setting the next target is easy. I take the depth of the pattern, and I add it to the top of the breakout.
As noted in the chart, the depth was $7, the breakout was at $123, so the new target on the GLD is $130. It’s not a foolproof system, but it happens more often than not.
The downside: The risk here is down to the support line, which is about $121.75. While this breakout looks good, these things don’t always go straight up to the target and it may test support before going higher again. I’d set a stop if there was a hard close below support; it can go beneath support during the day’s trading, but if it gets stuck there at the end of the day, close it out.
The play: With a target of $130 and a downside of $121.75, the risk-reward – the r multiple – looks great here. As a trader, if we get into trades with a good r multiple, we can be right less more than we are wrong and still make money.
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