December 17 - Counter Trend Trading (GLD)

In today's post I will show a high probability counter-trend trading strategy that I often use with a great success rate. This is what technical trading is all about; to recognize patterns which have in the past yielded a certain outcome and are "highly-probable" to yield the same result again. Of course there is never a guarantee that the pattern will play-out the exactly the same and that's why stop measures are taken to reduce downside exposure in case the trade doesn't work out.

Below is a daily chart of GLD which is the StreetTRACKS ETF for Gold:


Now this is obviously an after-the-fact plot which demonstrates the result as it has played out. The pattern before the breakdown around the 7th is that of a steady uptrend following an uptrend channel. Then the price runs away from the trend and starts a sort-of a "panic" buying frenzy where the new trendline has a sharp slope to the upside. These buying frenzies are often unsustainable, especially in heavily traded larger stocks/ETFs.

Near the end of the sharp uptrend the RSI shows an over-bought situation. On the day of the break the volume shoots higher than the average volume as traders sell out of this ETF and create further downward pressure. At the point of a confirmed break a short position should be initiated with a stop to the upside either in the form of a stop-loss or buying calls in the ETF.

Since the break the stock has declined a good 7% while consolidating near the "pre-frenzy" trendline and at the right side of the chart it looks to be bouncing back from the steady uptrend line.

For my trading this has been one of the most effective and profitable.