In my last analysis, I argued that gold bulls needed to defend the bottom of the range at about $1218.68/oz.. If they failed to hold the price there, it was likely that it would fall all the way to the bottom of the triangle at around $1169/oz.
Since then, the price did fall through the bottom of the range and go down to $1204.65. But then it rebounded back into the range once again.
So was this a false breakdown...or something more?
Bloggers in the gold-investment community are almost universal in proclaiming now that the gold retreat has come to an end. For example, here are just a few of the blog titles I've seen within the past few days:
· “Gold And Silver Have Confirmed The Bottom Is In” (Investing.com)
· “Speculators Sour on Gold and Silver, Which Means The Bottom is Near” (The Daily Coin)
· “Gold and Gold Miners - Switching Gears, Gold Has Bottomed” (Seeking Alpha)
Supposedly, all of this euphoria is because Janet Yellen made some dovish statements in her testimony to Congress on Thursday and Friday. And this, according to many gold experts, means that neither “quantitative tightening” nor interest-rate increases will happen as quickly as traders had assumed.
It could be that these bloggers are correct, and that we have indeed hit bottom. However, it's usually not a good idea to follow the herd when trading.
In addition, I would argue that it is just too soon to go long.
Here is why:
The four-hour chart reveals that gold has been in a very clear downtrend channel since June 6. The top of this channel was retested on June 14 but failed to break through.
Since the Yellen news broke, it is now retesting this channel again. However, the bulls on Friday tried to invalidate the channel and were met with strong resistance. By Friday's close, they had lost the fight.
It's possible that Monday or Tuesday could bring renewed buying and a strong move upward. But until that happens, a long trade is very risky.
A more likely scenario is that the price falls back into the middle of the channel and continues to decline until it gets to the bottom of the long-term triangle at around $1170/oz.
At that point, it will probably go up very quickly. But not until then.
However, we should always keep an open mind. If the price does break out of the channel in the next few days, then it probably does mean that the bottom is in and that the price will not make it down to the bottom of the triangle this time.
Assuming that the channel is not immediately broken on Monday, there's a great opportunity to short here. A stop slightly above the top of the channel at $1234.58 and a TP at $1208.66 (the low from Tuesday) will produce a 3:1 reward/risk ratio.
Alternatively, the channel could be invalidated. If this happens, a long trade entering at $1234.97 could produce a 3:1 reward/risk ratio if a stop is placed at $1219.15 (the bottom of the range) and a TP at $1256.56.