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Gold Trade Idea - Fade a Pullback to Around 1320

Gold fell from 1345 to 1292 in a couple of sessions. Price is sticking around 1300 for now. Let's first examine the possible outlooks.

Gold Daily Chart 7/16

1) Bearish - The bearish outlook is highly possible in the short-term after such a strong downswing, which basically indicates that the previous pop up to 1345 was an exhaustion swing. Even though the trend might not be bearish, the downside risk could be toward the 1268.50-1276.50 support/resistance pivot area.

2) Neutral - The 2014 "trend" is sideways. It is very possible that price wants to stick around the psychological 1300 area. In the neutral scenario, there is still room to oscillate above and below 1300. A short-term bearish outlook to the 1268.50-1276.50 area would remain in this consolidation context.

3) Bullish - In my opinion, the bullish scenario is the least likely.  Needless to say, but I will say it. Anything is possible, so don't be caught unprepared. 

If we wait for a pullback, we can hedge some risk of a bullish continuation. In the 4H chart, we see some common resistance factors:
1) At 1318.75, we have 50% retracement of this week's decline.
2) around 1320, we see the 50- and 100-period SMAs in the 4H chart.
3) 1325 is the 61.8% retracement.

If we put a stop just above 1330, let's say 1335, and place an order to sell at 1320, we would risk 25 points. A target of 1270 would offer 50 points. This is a 2:1 reward to risk trade - not bad.
Gold 4H Chart 7/16


However, if the stop is not above 1345, we risk not giving this trade enough breathing room. To address this, consider placing a stop around 1355. This however brings down the reward to risk to 50:35, which is 1.4:1. I am not sure this is attractive enough, but it does give more possibility of the trade working out.

It's always a trade-off between elbow room, and risk at stop-loss, but one thing is for sure, if you fade around 1300, you have a lot more risk, and fewer clues that the market is actually neutral-bearish. If price stalls around 1320 and falls, we would at least have an additional bearish clue, and will have more chance to manage the trade as price moves lower.