Chart of the week: A second bite of the cherry

Randgold back in rally phase

This share has been one of my star trading vehicles and I last covered it on 10 July when the gold price was falling into major support, as were Randgold shares. In that article, I outlined how to use my Break Even Rule to make a profit even when the price runs up and then back down to your entry.

Of course, this is a true technique for traders, not one used by buy-and-hold investors. But it does require more attention to the market. Sad to say, making money in the markets does require some work.

The lazy buy-and-hold approach requires no effort but can only work for a few rare issues which are in perpetual bull trends. And you have to know when to finally exit - a skill not given to many.

This was the chart I showed in July:

At the 6,655p level, the shares were testing the major support trendline and a sensible play was to go long there using the May low at 6,500p as guide for your stop loss.

With only a small risk to the stop, this was a very reasonable trade since the main trend remained up. So how did this trade work out? Here is the updated chart:

As it happened, that date 10 July saw the low of the move for both gold and Randgold. I honestly did not fix that! The support did hold and from there, gold and the shares started a vigorous bull run with the shares hitting the 8,200p level last month for a pretty decent gain of 1,600p from the July entry.

And with the shares over-stretched, it was prudent to take at least some profits off the table.

Since retracements of a Fibonacci 50% or 62% are the most common, I set these levels as likely downside targets. But as the extension of the upper trendline resistance cut through the 62% level at around 7,200p, I believed that target was the most likely.

And if it were to be attained, the market would likely place a kiss on the trendline. After a kiss usually comes a scalded cat bounce with the market shooting rapidly up away from the support. Seeing that kiss develop a little after 10 July, you could have forecast a vigorous rally, as I did.

In fact, that roadmap was highly accurate and new long trades could have been entered there at the 7,200p level.

Now the shares are trading up at the 7,500p area and appear headed higher. Of course, taking new long trades here incurs a much larger risk to a sensible stop (say, under the 7,200p level).

So, it is much better to enter at either a major line of support or at a major Fibonacci retrace - and that is why paying attention to the market at least on a daily basis can really pay off in reducing your risk.

Once you have your high and low pivots, you can set your Fibonacci levels and they give you the 50% and 62% targets and use these for setting limit orders on your platform.

That way, you are ready and do not need to be constantly monitoring the market - a great method for busy traders!