Momentum weakness is shown first by a move below the uptrend line. Momentum weakness also comes from a contraction in the range of trading for each day. The degree of movement is more limited and the price returns to the trend line support. This slowing of momentum is acceptable. A move below the trend line is an important confirmation that the momentum is developing trend weakness. Its my sell signal to protect profits.
Momentum and trend reversal signals, on the other hand, are a different combination of price behavior. This is seen in the area marked A on the chart where the price achieved a previous set of targets. Price moves tentatively towards the target level and then develops a significant sudden pullback. The reaction away from the target level is very strong, and has the potential to take away significant profits.
The pattern of retreat from the target level includes a rapid drop from $1,260 to $1,210 in a few days. We protect against this type of profit erosion by using a tighter stop loss as the price moves towards the target level, in this case near $1,355. The first warning of this potential retreat behavior comes from the short term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. They develop compression behavior, signaling selling activity from traders.
If price develops a continuation pattern as it approaches $1,355, then the trade remains open and the stops remain at the usual level. Trend continuation is signaled when the relationship within the short term group of averages in the GMMA indicator do not change. Currently this group is well separated and the degree of separation is consistent. This shows a reduced level of trading activity. If this relationship continues as the price moves towards $1,355 then there is a high probability the trend will continue above the target level. In this situation the trade remains open and new upside targets are calculated.
I am enjoying the current weeks long flirtation with gold, but I am not mistaking this for a lifetime commitment. I am a true gold digger so I am ready to cut and run at the first signs this trend momentum is weakening.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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