Gold’s Stunning Two-Way Reversal

Sep 18, 2008: 7:49 PM CST

If you haven’t been following gold prices lately, there’s something interesting that may grab your attention and is at least worth a second look.  First, gold prices skyrocketed 10% Wednesday and then rose by a similar amount today, yet closed lower on the day.  What gives?  Let’s look at these developments.

First, Gold ($GOLD) on the Daily chart:

Gold prices initially violated the 200 day moving average in late July and trended sharply lower to $740 per ounce before forming a positive momentum divergence prior to the neckbreaking rally of this week.  Notice the mini-bear flag that formed that in late August that truncated prior to reaching its target.  These are good examples of these patterns for further reference.

Nevertheless, gold broke above the bearishly slanted (and oriented) moving averages and now hovers at possible support (from the prior swing high and the 50 day EMA).  As you’ll see from the weekly chart, the 50 week EMA is currently providing resistance, though a penetration has occurred.

Gold Prices Weekly:

Though the MA orientation is still positive, the 20 EMA is not far away from a cross beneath the 50 EMA, and if price closes beneath $850 per ounce on Friday, we’ll still have the moving averages acting as primary resistance.

Gold is generally a ‘safe haven’ from inflation and uncertainty, but if people who fled the stock market in fear begin to regain confidence, then we could expect to see these recent gains in gold disappear quickly (as evidenced in the stunning intraday reversal today).

Let’s see that on the GLD – the Gold Trust ETF.

GLD (Gold ETF) 5-minute:

There were a couple of price consolidations and another mini-flag pattern and buy set-ups at the rising 20 period EMA, but ultimately price ran up to form its intraday high in the afternoon and then began its gentle slide which turned into a sudden sell-off as the broader stock market indexes recovered quickly and violently.  This pattern could continue into the weekend if the markets are strongly higher on Friday.

Keep in mind it’s quadruple witching, which often brings unpredictable price swings and volatility as large funds unwind and roll positions in the futures and options market as needed.

Guard your accounts!

4 Comments

4 Responses to “Gold’s Stunning Two-Way Reversal”

  1. Cruz Tijerina Says:

    As usual excellent technical analysis of today’s action but you must keep in mind that the news today (the potential “solution” to bad assets on financial company’s books ala RTC) threw technicals out the window. The report came out at around 3 PM (Gasparino on CNBC) and a powerful rally in equities ensued with a corresponding drop in gold prices. Notice how it is exactly at 3 PM that gold breaks violently through the 50 period EMA (blue line) in your chart only to close substantially lower from there.
    Today was one of those days that day traders only dream about as going long the DDM (double DOW ETF) right when the news came out and the powerful move higher (on heavy volume) followed presented a low-risk buying opportunity (in conjunction with proper money management and tight trailing stops). Whether you agree or disagree with the way the Fed/Treasury is handling this financial crisis it is important for us to be able to have a firm understanding of intraday/short-term market psychology so we can profit from these powerful moves. Couple that with the SEC enforcing rules (once again) against naked short selling and the potential for the SEC to outright ban short selling in some stocks altogether (which is the most ridiculous move I have ever seen the SEC entertain) and it seems that the market is going to explode to the upside even if this reeks of official market manipulation (notice how tomorrow is options expiration day on an election year when most of the population is paying close attention to financial markets as they make the headlines every day… coincidence?)

  2. Corey Rosenbloom Says:

    You’re 100% Right – the news and hype/emotions/fear/proposed solutions/etc – will override any technical, quantitative, or fundamental set-up/entry/stop-loss placement, etc.

    I do my best to avoid news and if I anticipate a major event, I try to reduce or limit trading ahead of it so as to try to focus probabilities on the technicals (price/momentum/support/resistance etc) as I understand it and mitigate the risk accordingly.

    As always, a sudden burst of news can destroy any positive expectation we have which is just part of the game. I try to focus my expertise on the charts and focus on the perceived structure and opportunities and identify high or low risk points and create a short-term expectation of the highest probabaility price swing and that’s all we really can do without massive trading operations.

    I’m with you 100% also on the regulation/banning short selling and I’m feeling so much anger and frustration right now but dare not express that on the open blog. It’s unbelievable. I almost want to sit Friday’s action out and let the dust settle and pick back up on the weekend but if price skyrockets to the upside as everyone expects, I want a piece of it and won’t be able to step aside most likely when I turn on the trading terminal in the morning, despite how conflicted I feel about what I think should or should not be happening.

    What an unbelievable week it’s been so far with much more to come. Thank you for sharing your thoughts.

  3. Corey Rosenbloom Says:

    PS – although I didn’t go into detail in the open post, I meant to write that the second green arrow I highlighted was a classic and strong bull flag pullback into support which was destroyed by the afternoon news and equity rally. It could serve as an excellent example of how perfect set-ups (positive expectations) are only that – probabilities – and are subject to many factors and that trading set-ups have edge because the targets are larger than the stops and generally the patterns ‘work’ (obtain their target) greater than 50% of the time.

    So this is a good example of a busted bull flag.

  4. Cruz Tijerina Says:

    I truly am lacking words to describe the situation we will live today on the financial markets. Every fair rule we know has been overriden and all of a sudden the government (fed/treasury/SEC) has decided that 799 financial institutions CAN NOT BE SOLD SHORT. No, it’s not a misprint…this is an artificial floor on the market and as I am typing this the S&P futures are +65 points and the DOW futures are +440 points. Let’s see how this works out and hopefully all the readers of this blog can take advantage of this.
    This intraday market will be so difficult to trade because my natural initial response would be to fade this nonsense after the open but guess what, who would be behind me if 799 financial companies CAN NOT BE SOLD SHORT !!! Also, the futures are higher by around 4% at this time which sounds like a perfect market to fade at the open but Europe was higher by 8-9% in some cases !!! I have also debated whether to trade at all on this historic day but most likely I will just go with the flow today. Today, the US government has decided that the stock market has an artificial floor and I for sure won’t be fighting THAT trend !!!!
    Good luck to everybody !!!