Gold Loses Some of its Luster

Mar 20, 2008: 10:55 AM CST

Gold plunged almost 6% yesterday, falling $59 as hedge funds unwound positions and speculators took profits in the precious metal. It’s an interesting development that warrants further attention.

I’ve drawn in two symmetrical consolidation triangles on the graph that highlight these patterns and the continuation move that occurred as the contract broke free from these zones to make new highs.

Much has been written about how gold is a hedge against inflation, and how both gold and crude oil have been making new highs, but that doesn’t mean the ride will be easy or smooth.

There were hints that alerted savvy traders to this potential development ahead of the major one-day plunge.

Notice the key negative momentum divergence that set-up as price made new highs but were not confirmed by new momentum highs. That was an initial warning sign that the bulls may be losing steam.

Second, notice the two long legged dojis that preceded the one day plunge. The doji on March 17th came close to forming a ‘shooting star’ pattern or a gravestone doji, both relatively bearish. Dojis tend to mark turning points in the market after a large rally or decline, and are said to be signs of “indecision.”

The candlestick just before the decline was also a doji, but more akin to a ‘dragonfly doji’ which also signaled ‘pause’ or indecision. Finally, the large volatility move signaled that the bears won the ‘battle’ and swiped prices lower, shocking latecomers who saw an easy profit because everyone said gold was making new highs.

Nevertheless, the structure still shows an uptrend, and we may have support coming in from the rising 50 period moving average.

 

2 Comments

2 Responses to “Gold Loses Some of its Luster”

  1. Gabriel Says:

    Thanks a lot for the great commentary… I’m learning something new everyday! I look forward to reading your real market examples… your analysis is really helping me learn more about technical analysis and how to apply it.

    Gabriel

  2. Corey Rosenbloom Says:

    Thanks, Gabriel.

    I’m glad to hear that! Let me know if there’s any suggestions or any way I can help otherwise.