, Investing Strategies

The fat pitch in gold

March 22, 2016 / by TradeSmith Research Team

If there’s one thing I’ve learned over the years, it’s that it isn’t always good to be early. It’s better to wait for the fat pitch … and the fat pitch in gold is setting up right now.

I’ve been burned too many times trying to jump the gun on an equity or an asset that I was excited about but that wasn’t quite ripe for the harvesting. That’s why I created the Re-Entry Rule … and the Low Risk Zone. These two indicators are both great … but they’re even better together.

The Re-Entry Rule is conservative by design. It has to be conservative to keep us out of unnecessary head-fake rallies and whipsaws … like it has done for gold these last few years.

By the time a Re-Entry Rule triggers, an asset has already enjoyed a substantial rally. To trigger a Re-Entry Rule we need an up move that is greater than the normal expected volatility of the stock (VQ%) AND we need the Smart Moving Average to turn up.

Taking the example of GLD above, the current VQ% on GLD is 13.5%. GLD bottomed right around $100 and it triggered a Re-Entry Rule around $116. It was already up 16% by the time that it triggered a Re-Entry Rule. That’s a pretty big rally for gold already.

It’s not uncommon to see a stock take a breather after triggering a Re-Entry Rule. A good example is when Alphabet Inc. (NASDAQ: GOOGL) leapt nearly 30% from below $550 to over $700 and triggered a Re-Entry Rule back in July 2015:

Sure, it triggered a Re-Entry Rule but did we really want to be buyers immediately after a shocking 30% rise? It’s times like this when the Low Risk Zone can really come in handy.

I often set up a Low Risk Zone alert right after a Re-Entry Rule alert. I like to see if I can get in on a pullback. It doesn’t always work. Sometimes the stock just keeps on climbing. But lots of times it does work … like it did in the case of GOOGL.

So much of successful investing is about being comfortable in your own skin. While I may not catch all of my favorite stocks by waiting for a Low Risk Zone signal following a Re-Entry Rule, I personally feel a lot more comfortable getting in at the top of the Low Risk Zone rather than immediately upon a Re-Entry Rule trigger. That’s my sweet spot. That’s my fat pitch.

As for gold, we haven’t seen much of a pullback in GLD since it triggered its Re-Entry Rule. But I’m in no hurry. I’ve got my Low Risk Zone alert set on GLD. The top of the Low Risk Zone in GLD is right at about $112.