Over the past few days, gold has made a series of news records after shooting past the previously out-of-reach $2,000 level at the end of last week. The dollar, conversely, is at a 27-month low, which helped boost the precious metal.
As a rule, the yellow metal is a popular safe haven asset among retail traders, and now, with this historic achievement, gold is in the spotlight, shining even more brightly. But we can’t help but be concerned there's a bubble brewing, increasing the risk of a pull-back in the market since equities are also at, or near, record highs after their COVID-19-triggered, mid-March pullback.
Overall the picture we're seeing is of a spring that's coiling ever more tightly, before exploding and taking something down with it. Of course, we can't say which part of the market will collapse, but we're betting on equities taking the fall.
We've been wrong about this before and could be again. Still, we believe traders can avoid the huge risk of an all-or-nothing equity bet by instead playing one safe haven asset against another.
But with gold seemingly headed for the stratosphere, buying it now could be like boarding a train when it's almost at the end of the line, with no seats left and not much more distance to cover. So yesterday we suggested silver in lieu of gold.
Today we're putting forward an additional alternative—Bitcoin instead of gold. Naturally, traders could simply do the obvious thing, the cryptocurrency versus a beaten down dollar since Bitcoin completed a reversal against the dollar, as seen below:
However, while such a trade has a higher potential reward if the dollar keeps falling, when it dips lower than its two-year low, the hazard of a pullback increases, ramping up the trade risk as well.
So we're offering a more subtle trade: buy Bitcoin while shorting gold.
Though Bitcoin has already completed its weekly H&S bottom, the BTC/XAU pair has not. Their trend line since the June 2019 high—which was initially a resistance—turned to support upon the breakout.
Both the MACD and the RSI are peaking, suggesting the price will complete the pattern. Now, while this trade may be higher risk, as the price has yet to provide an upside breakout, the BTC/USD could pull back amid the customer “return move.”
Trading Strategies
Conservative traders would wait for the actual breakout before risking a long position. Wait for a penetration, and preferably a close, above the psychological 7.0000 level and the height of the H&S bottom. Then, wait for a likely dip which follows a breakout, to retest the pattern’s integrity.
Moderate traders are advised to wait for the breakout as well. Traders in this risk grade may be content with a breakout that exceeds the Feb. 10, 6.71 high. They should then also wait for a return move for a better entry, if not to retest support.
Aggressive traders might risk a long position before the breakout, knowing and accepting the risk that this may not necessarily follow through. Risk management becomes crucial with this trade.
Trade Sample – Aggressive Long Position
- Entry: 5.5000 – upon a dip
- Stop-Loss: 5.3000 – the week’s low
- Risk: .2000
- Target: 7.5000
- Reward: 2.0000
- Risk:Reward Ratio: 1:10
Note: The trade depicted above is just a sample. Do not bank on it. It’s provided only to demonstrate how to develop a trading plan. Not every trade plan is suitable for every trader, budget, character or time-frame. Feel free to tweak this example to suit your personal needs.