swing trading

Gold Analysis (March 17, 2017)

| Swing Alpha on 7 Mar 2017 12:00 AM

If you've heard anything about the price of gold this week, you may be wondering why it rose on the back of a FED interest-rate hike.

Most of the financial media has been reporting that gold should go down if the FED increases interest rates. But it went up instead. So what gives?

In order to understand what's happening, let's start with a long-term chart of the price of gold.


Since 2011, gold has been forming into a symmetrical triangle pattern.

There is an uptrend line that has been in effect since 2005. And anytime the price hits this uptrend line, it bounces upwards. On the other hand, there is also a downtrend line that has been in effect since 2011. Anytime the price hits this line, it falls downward.

The price is being funneled towards the point at which these two lines meet, which it will probably hit by the end of the year if it doesn't break out before then.

Regardless, at some point the price has to break out of this pattern. But for now, it is stuck between these two lines.

Now let's zoom in further.


In 2016, the price rose into a range between around $1200.05 and 1250.48. It then moved in and out of a second range between $1250.48 and 1311.30 throughout April and May before finally breaking to the upside after the Brexit vote in June.

Once it broke above this second range, it ran into strong resistance at the 2011 downtrend line. As a result, it made lower highs repeatedly throughout July-September.

It then fell out of the third range and back into the second one on September 4 when a “stop-run” triggered a cascade of selling.

After election night, many investors became bullish on stocks and started selling shares of GLD in order to buy stocks they thought would benefit from Trump's policies. As a result, the price crashed until it got close to the 2005 uptrend line...at which point it started rising again.

It broke back into the first range around January 16 and has been there ever since.

Near the end of February, the price tried to break back up into the second range again. But it stalled when FED members started making hawkish statements implying they were going to raise interest rates at a faster pace.

However, once the price fell to the bottom of the first range, it became too cheap to pass up. But because the FED had not yet acted, many traders did not want to buy yet. So the price stayed at a floor of $1200.05 until the interest-rate decision.

As soon as the decision was made, it rallied.

So the answer to the question “why did gold rise when interest-rates were increased?” is simply that traders had already anticipated the interest-rate increases and had prevented the price from rising into the second range. Once this was done, there was no reason to push the price down even further.

If the traders who were selling at $1220.00 and $1209.00 intended to hold their positions after the FED meeting, they were making a mistake.

So how can a trader take advantage of the current situation?

Now that the interest-rate hike is over and we know that the FED is not planning to raise rates more than three times this year, we can expect that gold will soon attempt to break into the second range again at around $1250.48.

If it succeeds, a pullback to around $1252.00 will be an opportunity to buy with a take-profit at around $1311.00. But you may want to set your take-profit point lower because you don't want to get too close to the 2011 downtrend line.

Alternatively, if gold decisively fails to break through $1250.48, this will be an opportunity to short with a take-profit at around $1200.05.
3 Mar 2017 4:38 PM | Anonymous

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