Chart of the Week - Gold revisited

Each week Longleaftrading.com will be providing us a chart of the week as analyzed by a member of their team. We hope that you enjoy and learn from this new feature.

The chart shown Below is a daily chart of the August Gold Futures. Last week, my “Chart of the Week” submission highlighted the potential targets for Gold if it were to rally in the near future.  While my idea was technically sound, I admit to missing the fundamental driver behind Fridays move higher. I thought it would be best to discuss Gold again this week.

Last weeks chart noted the support level in Gold (see arrows on chart numbered 1) from December of 2011 that also held three times in the month of May. My thought was that Gold futures would continue to hold the low and rally to the first resistance trendline (shown on the chart labeled #2). The reason I chose this level is because all Gold rallies since March 1st have been snubbed by this downward sloping line. A three month trend like this made Fridays high price the obvious standout for resistance.

Take notice of the fact that on Friday, the Gold failed to close above the line. It had a strong upward bias, but not enough courageous buyers to make heavy purchases and drive the market higher to close the week. Instead, Gold closed slightly below, then saw light follow through buying on Sunday night. I believe that the next few days for Gold Futures will be very important for direction. It is shown on the chart (as seen by the arrow labeled 2 on the April high price) that the last time Gold tested this line, it spent a few days consolidating all around the trendline before ultimately dropping one hundred dollars lower. Gold will need convincing closes above this line before the three month trend is considered broken. If it can break this trend, Gold prices should begin a choppy trade that would likely find heavy resistance around $1725 an ounce (see arrow number 3 on chart). I would not expect the market to move to that price in a hurry, but it would be the next major target that I believe Gold traders would have in their sights.

When I submitted last weeks “Chart of the Week”, I did not expect Gold to rally after an extremely disappointing Non Farm Payroll. I thought traders would drive Gold prices up after hearing favorable market news, not the opposite. But it is clear that the Gold continued to pay attention to the direction of the US Dollar. When the Non Farm Payroll number was reported, the US Dollar traded lower and this helped Gold inch higher, as traders expect that the odds of further participation from the US FED will be greater if we continue to see poor economic news in the States.

I will be advising my customers to keep a close eye on Gold prices over the next few days as technicians will be looking for confirmed closes above resistance before committing to a strong purchase. If this does not happen, Gold could slide again as it did the last time we tested resistance on May 1st. In the next few weeks, the market will look for clues in a testimony by Ben Bernanke, followed by an ECB rate decision along with an important vote in Greece.

If you would like to discuss the material presented in this piece, please feel free to contact me directly by phone at (888) 272-6926, or by email at

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. You can also comment directly on this page as well.

Good luck trading!

Brian Booth

Senior Market Strategist



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888.272.6926

30 thoughts on “Chart of the Week - Gold revisited

  1. My experience has been that the HFT engineers work with Fibonacci and Elliott rules. It's not as random as you think. I trade a few leader stocks in the $100-200 range, full-time. I hope this helps.

    1. I do not think it is random at all. In the last few weeks, I have seen many markets during the day and in overnight sessions make directional moves without any reason, just to shake out stop orders.

      Take for example, the S&P 500 last week on Thursday. Just before the close of the open outcry (the day before a huge disappointment in Non Farm Payroll) the index rallied just high enough to trigger buy-stop orders, then sell off into the range to finish the day. Then the market spent the entire next day getting clobbared. On Thursday afternoon, it was the only market moving in a ten to fifteen minute window.

      There have been many other markets that have had similar movements, especially intraday! It is brutal to watch even if you are not holding positions!

      1. Brian, I am so glad to read your post as I have felt for several years now that the market is definitely rigged. I've watched it move fast right before news of importance was released. In addition, I have seen the market move without any news that I could find.

        1. GG,

          I can't say that I beleive that the market is rigged, and here is why. In the futures market, any positions that are executed need to be sufficiently margined.

          If there are several funds or several trading programs backed by funds that have the capital to impact a market, then they are free to buy or sell positions at will. If the movement in the market is enough to attract speculation to piggyback the move up or down, then it will only strengthen the move up or down.

          I can only speculate that a move up like that was driven by a few funds and without any proof, its impossible to say who or what was behind the move.

          1. Hi Brian, I understand what you are saying, but I am still suspicious of the dark pools and who is moving the market. Take George Soros, for example. These dark pools are what I am talking about when I say the market is "rigged" to beat the retail traders. Is this thinking flawed?

          2. I guess the best way I can answer that is to say that I do beleive that larger funds and those with enormous amounts of capital and buying power can definitely make it difficult for retail traders to trade on a day to day basis. There is no question there.

            But there are retail traders that I work with that have been bearish on just about everything since the first day that Ben Bernanke made his first announcement that the FED was no longer looking to ease the markets. That news has shaken the markets in a huge way.

            Some had to wait to sell into rallies, but overall the strategy has paid off. And needless to say, they had to give the market a bit more room than they normally would, but sticking to the plan has allowed them to transition from a day trade to a swing trader or better. Overall, the market never allows any trader to maintain one strategy forever, they all have to adjust when the mood changes.

        1. GG,

          I read the article and I agree with this idea.

          The real test will now be picking a spot to execute the idea and timing your entrance and exit. And let's not forget identifying your risk parameters.

          I enjoy writing this piece "Chart of the Week", as I get some very constructive feedback. But it is difficult to put together a cookie cutter plan that fits every investor that reads the material. So without knowing much about your (or the author of the articles)experience trading GG, I am hard pressed to tell anyone to floor the gas pedal. But I do think this setback in the precious Metals will begin to look attractive to big money very soon. If I am wrong, I know exactly where I would advise traders to adjust or exit their positions.

          Feel free to call or email me if you would like to discuss this further.

          Thanks!

  2. HFT/algo trading is roughly half of the market volume and growing. Their unregulated, legal, profitable, trading 100m + shares a day, and it's an election year, go figure....this is probably the last we hear about until next year.

  3. i totally agree with you, i personally didn't expect the gold price to rise so much on friday. After the uptrend you mentioned the markets became so volatile, for short term traders, to an extent that if anyone didn't know what he /she was doing , 1 would be having the markets riding him to confusion. I also believe the gold price will have a slight drop in the next few days before it bolts to another choppy uptrend. I would advice to keep watch of that downtrend for a possible buy before it makes an uptrend.

    1. Thank you for the reply Zolani. I know first hand how difficult the short term Gold market was over the past few weeks. If the day session was not enough of a jagged pill, the night sessions would make up for it.

      Over the next few days, look for the ECB rate decision and the press conference for clues. Additionally, Ben Bernanke will be back on the report lineup (if all goes as planned, news will be posted on the 7th) after a short testimony. It looks like the G7 talks failed to produce anything this morning, so we will have to just wait again.

      After Fridays rally, I put together a few shorter term charts. Let me know if you would like me to shatre them with you. Feel free to email me at my work address.

  4. Whats curious is that Gold and gold mining shares decoupled from the downward trend in stocks and other commodities like copper etc... At some juncture, as a fear trade (which I think we are seeing the beginning of) gains momentum, Gold should start to perform more like the safe haven it truly is and less like risk off/on trade. With people fleeing the banking systems in at least half of Europe, China increasing it purchases on the QT, and hedge funds starting understand that gold should be at least part of the portfolio, this shift is coming sooner than we think. I mean, whats your alternative??? Spanish bonds?, Greek Bonds? French bonds? Hell even German Bunds are at risk in a downward world economy. Certainly, people will also start to see that the US treasuries are no better. Frankly, there is a currency in the world I would want, with exception of gold, at this juncture.

    1. It certainly could be J.

      We have seen this before, the dreaded dead cat bounce. But I do think there is still a chance for the market to leg up from here. The rally to this target came just in time. It was on the heels of the ECB decision and Ben Bernanke's testimony this week. This is why I feel the market will consolidate up here until the press conference, then pick a direction. The difficult part of the trade will be speculating on how the Gold trade will respond to news in Europe. But at least won't have to wait long to find out.

  5. Yes, it's got work to do, getting thru 1820may take a little time, but technicals & fundamentals will see it to 2100 OK, with target 3000 which is not good news for global financials.

  6. I hope this helps, as of today gold has retraced 50% of the prior decline, confirmation of the next major move down will be the break of support at 1527.

    1. To put this another way:

      It decisively broke an upward trendline in effect for 3.5 years in early May, with both the 50 day and 200 day MA now falling, and the 50 day crossing below the 200 day MA in mid April for the first time since 2009.

      In mid to late May it dropped to just below $1550 which is where it found support before, in late September 2010 and late December as well. Around $1527 is the new support line.

      On Friday in a one day advance it returned to the trendline but was unable to break through. Its been going sideways ever since.

      The downside break was out of a symmetrical triangle. Since it broke to the downside the indication is it has further to go to the downside.

      Return to Breakout: A basic tenet of technical analysis is that broken support turns into resistance and visa versa. When the upsloping support line of the symmetrical triangle is broken, it turns into resistance. Sometimes there will be a return to this newfound resistance level before the down move begins in earnest. (Friday's rally did just that.)

      The drop to below 1550 setup another triangle, this time a descending triangle.

      Either one calls for much further downside than we have seen so far. My target is somewhere in the low 1100's.

      Andy

      1. Thanks for the reply Andy. I understand the Return to Breakout analysis, and this is why I feel the market targeted and continues to consolidate around this price. I feel that the remainder of this week is extremely important for the price of Gold as we wait on news in Europe and the US.

        While we consolidate around 1620, it is difficult to predict which direction the market will head following this weeks news. My thought is we will head higher, but if I am incorrect, I will suggest adjustments to positions.

        I can see that you have experience in trading and enjoyed your take on the Gold. In this "Chart of the Week" piece, it is impossible to put together a strategy that would apply to every type of investor, but technicals help to give a broad overview.

        If you have time, please contact me directly by email. I would like to hear if you are involved in any other markets.

        1. Brian,

          I'm more of an observer than a trader. In fact, I don't trade at all. I've experienced my limitations firsthand, so I just watch for now.

          I did email you about this subject.

          I feel we are at the end of a very long bull market in expectations. Expectations about everything, gold being just one of them. We are very close to the top, if the top has not yet been reached. When I look down its hard to see the bottom. Very scary.

          So far the powers that be have succeeded in postponing the day of reckoning. How much longer can they do this? At what point does the pyramid just implode on itself, first driving a mad scramble for dollars, followed by an equally mad scranble for gold? I'm a long term bull on gold, but I'm now waiting for the market to wash out the current crop of gold bugs so gold can resume its bull market. Which is why I'm bearish for now. I don't see the bull run resuming until the pyramid has been toppled. That may take awhile.

          Today the gold market is waiting for something. Low volume, prices going sideways. QE3? How? QE 1 and 2 failed miserably. Is the FED really going to try again? If at first you fail, try again and again? I don't think so. I think the FED and everyone else has run out of ammunition, and I think that's what the market is telling us.

          I never though I'd see the day when 10 year Treasuries yielded less than 1.5%, yet that has happened. I suspect they will go much lower. Low interest rates are NOT the sign of a healthy economy, the prognostications from the FED notwithstanding.

          Andy

          1. Andy,

            Let me start by saying that I agree with your long term thoughts on the market. I do think that the term "kicking the can" has had more play over the last few years than any other term known to man. This sort of activity usually leads to pain and suffering at some point when markets are unable to produce sustainable positive results.

            But there is one thing that stands out in this current market. Markets will respond to anything that looks, smells or sounds like another bailout. And if that information comes any time in the near future, we may see a strong recovery. We have seen how much credence is given to these bailouts before, and the markets could use something to bring back volume. So whether or not I totally agree with continued Central Bank participation falsely inflating markets or not is irrelevent. I will just have to adjust my strategies accordingly.

            As a trader, I am most hoping for anything that will take control away from the computer generated algo's that are clearly in charge of intraday swings in the markets!

  7. Gold and silver charts won't mean much as long as trillions of dollars worth of interest rate swaps continue to be purchased, in order to prop up the US dollar, along with ever more frequent massive naked shorts of gold and silver. Like selling a years worth of silver production in a couple hours . . . a logical move for someone wanting to make a profit, right? In other words, as long as massive, utter corruption is sanctioned at the Federal level, you are not seeing normal market forces at work.

    Best plan . . . average in physical metal at low prices and hold on to it for a couple years. And don't store it in a New York or UK bank vault! A hole in your backyard would be safer! As the Big Banks get increasingly desperate, absolutely nothing is going to be immune from theft. Remember MF Global? (The Feds don't seem to . . . )

    1. Steven, totally agree with you all the way to the hole in ones own backyard. Why should anyone trust a bank at this point. When one contemplates the total destruction of our dollar at the hands of our Fed, then physical gold appears to be among the best choices.

      1. totally agree gg. A bell is not going to be rung the day before the collapse.Where do you want your assets in gold and silver or fiat dollars? It's a no brainer for me

    2. I am just trying to make a living guys. I agree its a tough market right now with light volume trading, but money is still being made.

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