A little over a month ago I analyzed the gold market, highlighting the range between $1,900 and $1,500 that prices have been stuck in since mid-2011. You can reread that article here.

I also mentioned a simple mean-reversion strategy that took advantage of gold’s tendency to hop above and below the $1,700 mid-point of this range. In October, the historical profits provided by this strategy were $515,820.

Today I have an update…

The week after writing the original article gold futures closed below $1,700. And according to my simple rules, that meant short trades should be covered.

The system sold a total of eight futures contracts during the eight weeks that gold traded above $1,700. Remember, this strategy “fades” the market with the expectation that prices will reverse back to the average ($1,700 in this case).

Closing out these eight short positions added another $61,840 in profits to the strategy.

Then, the system called for us to buy one gold contract on November 5. One week later, gold prices hopped back above $1,700 and that one long trade was exited for another $5,510 profit.

Finally, four new short positions were established over the last four weeks, as gold held above our $1,700 threshold. These positions are doing well, as gold is now below $1,700 as I write.

Here’s a chart of gold futures prices with a “trend” indicator at the bottom:

See larger image

The “trend” indicator still displays a very low value, suggesting the congestion phase gold is stuck in will persist. This is the perfect environment for a mean-reversion strategy like the one I’ve suggested.

Technically speaking, I’m still bearish on gold prices. The recent rally above $1,700 was very short-lived and failed to make a new high. I’ve highlighted the recent “lower high” with a red circle in the chart above. This suggests gold bulls are weak and can’t muster a strong rally.

Looking ahead, if gold breaks below about $1,670 I think it could go as low as $1,550 before finding any meaningful support again. Over the longer-term, we continue to see $750 in gold’s future.

At any rate, if gold closes below $1,700 at the end of this week we’ll have more profits to report. I’ll keep an eye on this…

If you haven’t done so already read the Survive & Prosper issue on “Economists Just Don’t Grasp the Power of Demographics.



Your Special Boom & Bust Offer!

Investing is no longer a set-it-and-forget-it affair. If you’re still using that outdated approach in today’s irrational markets, you’re setting yourself up for massive losses and a difficult retirement. There’s a much… Read More>>
Adam O'Dell
Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.