Gold completed a series of chart-based steps today that tend to precede a short-term reversal in price.

Let’s take a look at these steps and the key levels to watch to judge the odds for a true reversal, or yet another ‘trap’ and failed reversal against a prevailing price downtrend.

We’ll start with the Daily Chart:

Starting with the April two-day collapse (breakdown under the key $1,525 level that resulted in an avalanche of selling pressure), price completed a snap-back rally (dead cat bounce/bear flag) successfully to the falling 20 day EMA into the $1,475 level (also the 50% Fibonacci Retracement).

This was a key “make or break” level that allowed for “IF/THEN” scenario planning:

A breakthrough higher than $1,475 ’should’ continue up to $1,500 then if above $1,500, on to at least $1,600 for a reversal.

However, a ‘likely’ continuation or second sell-off impulse would take price lower to its initial downside target for a retest of the swing low from April near the $1,325 to $1,350 area (fulfilling a ‘dead cat bounce’).

The bearish scenario unfolded which leaves us where we are currently for the present short-term “Make or Break” scenario/trade planning.

In simplest terms, this level forms the foundation for a potential short-term reversal, yet if a reversal fails to gather strength at this key level, then we’ll need to turn to the higher frame chart to project additional downside targets for gold.

With the strength of today’s Bullish Engulfing Candle at this key visual inflection price level, it’s up to the buyers to keep this potential reversal going.

We turn now to the intrday chart of Gold Futures (@GC) for additional information, including Fibonacci short-term levels for intraday targets:

Let’s start first with the Fibonacci Retracement grid as drawn.

Today’s power-reversal intraday session immediately took price to the first target – the 38.2% Retracement which aligns with the “Round Number” reference price of $1,400.

Quite simply we’ll judge the probability of a reversal higher – and bullish trade set-ups above this level – depending on the follow-through with respect to the $1,400 key pivot.

A firm breakthrough above $1,400 would continue to tilt the odds in favor of bullish price continuation, stretching initially toward the $1,430 area (61.8% retracement) and then “IF” above $1,430, “THEN” on for an eventual target back to the $1,470 and $1,475 prior high.

While we have clear upside bullish levels on which to focus (particularly for intraday traders), do watch immediate price behavior into the $1,400 target.

A failure here would dampen the probabilities of reversal, particularly if price breaks under the $1,380 key short-term pivot support.

For game-planning, we’ll look for bullish breakout/retracement continuation set-ups above $1,400 (and $1,430); we’ll be neutral/cautious between the intraday reference levels of $1,380 and $1,400; and will look for a bearish “failed trend reversal” movement if firmly under $1,380.

By the way, the 20-min (and other intraday charts) show a persistent positive momentum divergence along with a visual momentum burst or “kick-off” signal – divergences and kick-off impulse signals tend to forecast potential price reversals.

It’s up to us, however, to trade and manage risk depending if the classical odds result in a successful reversal, or else whether a failure outcome occurs (which would actually be a downtrend continuation situation).

We see a very similar structure for those who prefer using the GLD Exchange Traded Fund:

Again we see the downtrend (lower lows/lower highs with bearish moving average orientation) in motion, yet the downtrend is “in danger” of reversing based on the higher frame support target, bullish engulfing candle (daily chart), positive momentum divergences, and momentum burst/kick-off signal.

To be clear, these chart-based signals do not guarantee a reversal (if only it were that easy!),  but it does alter the parameters for short-term traders with respect to key levels as mentioned for real-time assessment (and trade targeting).

I’ll be discussing this set-up along with pre-market and broader opportunities for stocks, ETfs, oil, and currencies during my Morning Market Briefing each Tuesday morning at 9:00am EST/8:00am CST with TradeStation.  It’s free and anyone can join us so be sure to attend if you are available!

Follow along each evening by joining our membership services for daily or weekly commentary, education, and timely analysis beyond the daily blog commentaries.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Corey’s new book The Complete Trading Course (Wiley Finance) is now available.

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As a trader, I’m drawn to key price or trendline inflection points that generate simple “IF/THEN” strategy planning events depending on how price interacts at a critical reference level.

At the moment, Amazon (AMZN) shares are trading down from a critical inflection point that will set the stage for short-term trading strategies for the stock.

Let’s take a quick look at the current inflection zone and note what the expectations will be for channel or pattern continuation or else a breakout above the known resistance/inflection level.

Keep in mind our goal here is not to predict the future, but to note price behavior (supply/demand) at a key inflection point.  Trades develop naturally from the higher timeframe structure as we watch the lower frame evolve in real-time.

For now, the simple key inflection point for Amazon is the $270 per share level as it reflects the upper bound (target) of a falling range (declining parallel trendline) pattern.

A breakthrough ABOVE this inflection point that carries above the prior “spike” or Bull Trap high into $275 would be expected to continue through “Open Air” back to the prior established high into $285 per share.

That’s the Bullish “IF/THEN” Scenario Plan.  The Bearish plan calls for a simple continuation of the short-term pattern which would suggest a bearish outcome all the way back to the $245 per share level (the lower boundary target).

We’ll be following along in real-time comparing evidence as to whether the bearish $245 target or $285 upside breakout target is favored.

For now, odds seem to argue in favor of the downside target given the negative divergences and the two doji reversal candles into the critical $270 target.

When in doubt, or to get additional information from a Higher Timeframe Inflection level, drop to intraday charts:

The Hourly/intraday chart shows the recent rally up to the $270 target in May which has been ‘undercut’ by negative volume and momentum divergences along the way (ever since the volume and momentum peak on May 3).

Again, the chart evidence points for simple odds – at least from an intersection of divergences into resistance – as favoring a bearish outcome.

However, as traders, we are always aware to alternate possibilities if only for risk-management strategies (placing stops above an expected resistance zone).  It would be far too easy if everything worked exactly as expected!

Savvy or aggressive traders can also set up a game plan to buy shares on a breakthrough above a resistance level that odds (charts) suggested would hold firm.

The strategy is to trade an unexpected breakout and the expected “Short-Squeeze” or popped stops impulse that would likely occur on a surprise breakout.

Thus, we’ll plan for a bullish breakout on a firm breakthrough above $270, allowing the one-day possibility of a vicious Bull Trap (a bull trap occurred on the April 25th high which preceded a ‘collapse’ in price the next session).

Otherwise, we’ll continue monitoring price should it continue trading lower as the divergences and resistance (Daily Chart Declining Trendline) pattern suggests.

If a full downside target is achieved, it will likely do so with a few chances for intraday traders to sell-short intraday bear flag or breakdown trades that occur in real-time as price moves toward the target.

This is an example of scenario planning on the higher timeframe which guides trading decisions on the lower frame.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available.

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Was the big breakout this morning in stocks a surprise or was it part of ongoing visual trends in broader money flow across the intermarket landscape?

Let’s look at the charts stretching back to late 2012 to see patterns and short-term insights into cross-market money flow:

As a proxy for “Money Flow,” we’re viewing the daily closes (line chart) of three “Risk On” Markets (Stocks, Oil, and Gold) along with two traditionally “Risk Off” Markets (10-Year Notes and the US Dollar Index).

Starting with November to present, we see a consistent trend INTO the Stock Market and OUT OF Gold.

While those are the crystal clear trends, Oil rallied with stocks through December but has since been stagnant or declining from its early 2013 peak.

Likewise, “Risk-Off” Markets Treasuries and the Dollar saw a decline into the early 2013 lows ahead of a March rally higher in the context of a short-term shift to protection/defensiveness in Oil and Gold (Commodities) but NOT in US Stocks.

In May, in conjunction with a continuation breakthrough higher (above 1,600) in the SP500, we see a mixed-money flow signal with a logical (expected) corresponding decline in Treasury prices but a sharp rally up in the US Dollar Index.

If we eliminate the US Dollar Index from the calculus, we see money flowing OUT OF Treasuries, Oil, and especially gold and continually into US equities, almost without any pause whatsoever.

With the broader picture, a continued breakout and rally in stocks is completely in line with persistent money flow trends since November 2012.

Here’s a quick look at the intraday or short-term flows (trends) (SP500 and Crude Oil):

Gold and the US Dollar Index:

For comparison, we’ll use the afternoon of April 17 as a vertical comparison of movement before and after this date (the bottom of a retracement swing in the SP500).

Note how the other three markets ‘bottomed’ the morning of the 17th as opposed to the afternoon reversal in stocks.

Even the US Dollar Index bottomed a day in advance of the stock market’s low.

All markets including gold saw a strong bounce/rally up through late April (though the Dollar weakened to a new low on May 1).

Short-term money flow continues to be bullish for Stocks, though the most recent swing has been to the downside in oil and gold.

Take a few extra moments to compare swing structure in terms of the red and green arrows across these four markets/indexes.

While these four ‘big markets’ give us a quick glimpse of broader money flow, you may also want to study related commodities, overseas equity markets, and the Treasury indexes.

It’s often helpful to view the intermarket landscape in terms of Stocks, Bonds/Treasuries, Commodities, and Currencies and visualize money flow between these markets in terms of Risk-On/Risk-Off movement for trade and position planning.

This is the type of logic/planning we use at the beginning of each week’s Intermarket Report where you can follow along by joining our membership services for daily or weekly commentary, education, and timely analysis beyond the daily blog commentaries.

Corey Rosenbloom, CMT
Afraid to Trade.com

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I wanted to highlight a curious situation with Market Internals in respect to the recent breakthrough above 1,600 in the SP500 (and 15,000 on the Dow Jones) and note the message from Internals.

While internals are always secondary to price, it’s still important to listen to the message sent by the number of stocks advancing minus those declining (Breadth) with respect to the movement of the equity index itself.

Here’s two perspectives on the “Collapse” in Internals with respect to the surge in equity prices:

The first chart shows us the full April period (to present) with respect to NYSE Breadth ($ADD) and Volume Difference of Breadth ($VOLD).

To recap, a Breadth reading/indication is the difference (subtraction) between advancing issues (those positive on the session) and declining issues (those negative on the session).

The red highlighted periods signify phases of Divergences or Non-Confirmations with respect to price (falling internals with rising prices) while the one green period shows dual positive divergences.

The MAIN LESSON is that price so far has been shaking-off or ignoring the message from internals, meaning the trend dominance overrules the signals from internals.

As the old saying goes, like volume divergences, internal divergences do not matter “until they do” (until price reverses as was the case the last time we saw a price decline from April 11th to the 19th).

A closer perspective drills into SP500-specific internals for a clearer picture:

The 5-min chart above uses only the stocks in the SP500 to calculate the Breadth reading (meaning an indication of 400 signifies that roughly 450 stocks are positive at that moment against 50 which are negative at that moment in the trading day).

The colorful indicator under $ADSPD (SP500 Advance-Decline Difference) is simply a visual representation – a color-coded histogram – of the breadth indicator for clarity.

Numerically speaking, the chart peak of SP500 Breadth occurred straight off the open on May 3rd (the “Jobs Report” breakout day) when the indicator registered a session high of 455.

We can see price creeping its way powerfully higher in pro-trend fashion, yet along the way, internals quietly diverged with the price index.

In fact, with a new all time headline-grabbing index high into 1,635, internals barely managed to poke their head above the zero-line, registering a session high reading of 46.

At the all-time high, 273 SP500 stocks were positive on the session against 227 which were negative at that time.  For the period before and after the intraday high, more SP500 stocks traded negative on the session than were positive (which is logical since the index spent the majority of the session negative).

What’s the bottom line?

Trends can most definitely continue (or extend) beyond what most traders feel like they should, and as such, price is the ultimate arbiter of our decisions, not internals or indicators when messages conflict (this includes other forms of analysis as well).

Nevertheless, we do look “beneath the market” to assess the strength or health of a price swing or trending impulse in motion.  We do this to gather clues with respect to leverage, trade management, and game-planning.

A market moving up with strong volume and internals has greater odds of continuing (reference the big bullish confirmation on May 3) and thus we can trade more aggressively with larger targets and greater confidence during these periods.

A market steadily moving up on declining volume and internals has reduced odds of continuing and thus we need to be more cautious, less aggressive, use tighter stops, and play for smaller targets when compared to the opposite type of bullish confirmation environment (again, reference early May).

It’s easy to get caught up in bullish headlines and sustained trend moves, but for long-term trading success, it’s often better to be more aggressive with our pro-trend trades when a price trend is confirmed by volume and internals, not contradicted by it.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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What looks like a “can’t miss” trading opportunity on one timeframe may be an equally compelling “can’t miss” opportunity on a higher timeframe, but in the exact opposite direction.

In other words, what looks like a grand breakdown opportunity on a Daily Chart may be a high probability bull-flag retracement set-up into support on the Weekly Timeframe.

That’s exactly what happened in April with Google’s chart so let’s take a quick moment to see this situation and take a moment to review the importance of using more than one timeframe for our trading decisions, if only for a filter.

Here’s the Daily Chart of Google (GOOG) as it developed a breakdown short-sell opportunity on April 18:

After a persistent uptrend that began with the November low, a natural pullback or retracement developed through March and April.

Generally, the dividing line between a retracement (pro-trend) expectation and a reversal (trend reversal) outcome is how price behaves relative to trendlines and rising moving averages.

For example, the breakdown and volume spike into April suggested Google shares were headed for a logical reversal instead of a pro-trend retracement like that which occurred in January.

Aggressive traders would be entering short-sell/breakdown orders to profit from an expected price slide to the downside.  They would also locate their stops at various levels above $770, $790, and even $800.

This would be the correct or logical assumption given the facts as they developed on the Daily Chart timeframe.

However, this wasn’t the whole story, and those who viewed only the weekly chart had a completely different interpretation:

Pretend for a moment we didn’t see the Daily Chart above and we’re a swing or position trader who likes to buy pro-trend retracements to key support/inflection areas.

We would likely see the chart above as a grand buying opportunity, or at least a low-risk opportunity to play a possible inflection up off the rising 20 week EMA and prior high (polarity) with a target movement at least to the prior swing high near $840.  Logically, our stop-losses would be located under $765, $760, or lower.

Viewing the weekly chart, there is nothing at all (with the exception of the negative momentum divergence) that suggests a reversal or bearish expectation, at least while price remains above the critical $760 inflection level.

The main idea is that Daily Chart short-sellers would have benefited from the extra information – and opposite perspective – provided by the weekly chart.

It would change their set-up from automatically short-selling the valid Daily Chart breakdown instead to wait for a confirmation trigger – and thus breakdown signal – provided by the breakdown under $766 and $760 on the Weekly Chart.

Note the highlighted Green/Red box over the prices.  This is how I tend to view “IF/THEN” outcomes in terms of price movement off a key inflection level.

IF weekly buyers step-in to overcome daily sellers into the $766 inflection level, THEN price will rally higher potentially to target or exceed the prior swing high into $840 in a pro-trend impulse.

However, IF weekly buyers do not step in and instead selling pressure continues to break price under the $766 key support level, THEN we would expect daily chart sellers with weekly chart breakdown sellers to push price down toward the next inflection target into $715.

We don’t know the outcome of a given set-up, and we can only plan IF/THEN contingencies and manage positions that trigger as price moves toward a target level or away from an inflection level.

While we can stop the lesson here with the Daily/Weekly integration, savvy traders will take it one step further to view a frame LOWER than the Daily Chart for clues on the chart that are developing as price interacts with this critical support area.

Here’s the quick view of the 30-min intraday chart as Google closed into the $766 20 week EMA ‘make or break’ level on April 18:

I won’t comment too much on the lower frame chart other to say momentum revealed a positive divergence relative to the early April price low into $770 when compared to the ‘current’ push into the $766 critical inflection level (a bullish signal).

We also see a falling parallel trendline channel intersecting the $766 level as price trades into this inflection zone (this is also the entire “flag” trendline as seen on the weekly chart).

Once again, we don’t know if Google will hold and reverse here (a bullish trade if so) or else breakdown and continue the short-term downtrend (a united Daily and Weekly breakdown sell signal if so).

The key is seeing the importance of the potential inflection level on the weekly chart that can’t be seen on the daily or intraday charts.

By the way, here’s the outcome of this lesson and set-up:

Buyers stepped in at the $766 inflection level, turning the tide back to demand/bulls and the outcome was the pro-trend continuation set-up as seen on the Weekly Chart.

Perversely, those who viewed the Daily Chart and took the valid breakdown signal later contributed to the upward price action as they became buyers to cover their short positions, creating a temporary ‘feedback loop’ or small short-squeeze.

For trading triggers, aggressive traders can buy as price trades along the higher timeframe support level while conservative traders can “wait for additional proof” in the form of a breakthrough above the falling trendlines and/or falling daily EMAs, both of which occurred under $800 as highlighted.

For additional examples of this “Dual Timeframe Conflict” lesson, view my prior posts on the topic:

“IBM Quick Lesson in Multiple Timeframes, Divergences, and Earnings”

“Goldman Sachs (GS) Threatens Cradle Sell (but watch Weekly Chart)”

“Daily and Weekly Conflicting Opportunities in IBM.”

Updated Post on IBM Shows Why Multiple Timeframe Analysis is Critical.

The Weekly Bullish Signal in IBM overpowered the Daily Sell Signal in that example, similar to the one here in Google.

“Bullish or Bearish on RIMM?  Depends on Your Timeframe.”

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available

Follow along each evening by joining our membership services for daily or weekly commentary, education, and timely analysis beyond the daily blog commentaries.

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