Friday, October 7, 2011

Gold - Consolidation Before an Explosive Move

Gold has been in a major bull market. It has served as a hedge against inflation, deflation, equity market decline, and fiat currency risk. On top of that it has benefited from insatiable physical demand by jewelers and central banks. Investors have accumulated an amazing amount of gold through GLD ETF.

So there is a constant bid underneath the gold market. If you glance at gold's long-term chart you can see a steady, uninterrupted ascent from lower left to upper right. The pullbacks are calculated, and are supported by long-term moving averages. There is a well-defined structure in place, otherwise there is no breakdown, yet. I have been a gold bull for a while, but I am not a gold bug, and do not find gold an attractive useful commodity. This said, there is a weird feeling that I have about this last violent decline. It does not look as orderly as all other declines in the previous few years. There is a clear and perfect double top at 1920 with broken neckline at 1750. Gold has been supported by 150 day simple moving average for over 2 years. It has been breached by 40 points on this last pullback, although there was no close below it yet. And there is a trendline from 2008 and 200 day moving average, both of which have not been broken yet.

Weird feeling or not. There is support on charts to trade against, but should it break, it will result in a strong move down. Let's discuss the probable scenario. Gold has formed a bear flag after the move down from double top. If this bear flag breaks it can result in a 400 point continuation down move from the top of the flag. This would imply a decline to 1280 - 1300 level, which would be astonishing, since we just had a 400 plunge already. I do not think many traders are prepared for this at all. On the way there possible scaleout targets would be: 1535, 1485, 1430, 1395, and 1350.

Traders are well-advised to wait for bear flag break first. Gold has been known for faking these down moves to suck the bears in and trap them. On the way up I see a resistance at 1700 and 1750. I do not think that gold can trade above those levels in absence of QE3 from US Federal Reserve.

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Update: Oct 10 @ 6:50 pm edt
Gold futures are testing the top of the flag @ 1680. This is a third time here at this resistance. DXY is not at its support yet. I am thinking a possible fake breakout to 1700 and then a hard plunge along with Euro is possible. I am definitely not shorting here. Scary beast can run all bears into hibernation practically in one trading session. I am looking for a bear flag breakdown to trade down to 1300. Quick 400 point trade may still be in order :) One has to remain patient and wait for aforementioned setup. First 50 - 75 points down from here may have to be missed. Quality setup requires confirmation and some money left on the table. No trades inside the flag, too choppy.

1 comment:

  1. interesting article! let see if we can catch the ups and the downs.
    Thanks for sharing.