swing trading


| Swing Alpha on 7 Mar 2017 12:00 AM
Gold Analysis

Is Gold About to Break Out?

In my previous analysis, I argued that it was too soon to call a bottom in gold. However, I also argued that a break outside of the descending channel would change my mind. And I even provided some strategies to take advantage of such a break if it were to occur.

The break did in fact happen on Monday, July 17. And there's starting to be evidence that something has fundamentally changed in the gold market.

For almost six years, gold has been trading in a symmetrical triangle. When it gets to the top of this triangle, it falls. When it gets to the bottom, it rises.

But on June 6, something strange happened: the price rose far above the top of the triangle and closed there on the daily chart.

This past Friday, it did the same.

However, the June 6 breakout quickly reversed. And most analysts concluded afterwards that it was merely a false breakout.

So now that we are back above the top of the triangle again, one can reasonably argue that this is the point where gold is going to (finally) fall back to the bottom at around $1181.86.

And this is a point of view that should be taken seriously. I would be very hesitant to go long here without some further confirmation that the triangle has truly been broken.

However, I want to present an alternative point of view that a lot of analysts might have missed.

Is gold in a “post-Trump” horizontal range?

Most gold analysts have been paying attention to the six-year downtrend line stretching back to gold's previous high at $1918.54.

But it's possible that this line has been invalidated without anyone noticing. If so, this is how the chart would look.

When President Trump was elected, the price of gold failed to break through a horizontal line of resistance at $1295.80 and crashed down to $1127.40 instead.

It has since recovered, but has gotten stuck at that same horizontal line of resistance. However, it has also found support at $1217.33.

When viewed this way, the current price is not high enough to meet major resistance. And it will probably rise to $1295.80 before falling again. A long trade here could therefore lead to a profit of $78.50 per ounce.

Now let's look at the chart again, but with both sets of support and resistance.

ed at this way, it appears that the triangle has already been invalidated. And the price fell on June 7 because it hit horizontal resistance, not because it had met the top of the triangle.

Whether this is really what is going on is unclear. What happens on Monday and Tuesday will be crucial in determining which way the price goes.

How to trade gold these next two weeks.

If gold rises to $1277.30 (the 200 SMA), a long trade targeting $1294.02 will produce a 2:1 reward/risk ratio with a stop at $1268.66.

Alternatively, a move below $1258.10 is a sign that the triangle is still intact. In that case, a short trade targeting $1219.15 can be taken with a stop-loss at $1286.77 for a 3:1 reward/risk ratio.

As always on weeks like these, watch out for NFP on Friday.

3 Mar 2017 4:38 PM | Anonymous

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