Gold fell sharply from the $1,800 resistance level, so let’s take a look at what led up to the fall and what the current structural levels to watch are for gold, including a Fibonacci Cluster near $1,730.

First, the Hourly Structure:

First, Gold’s Hourly (intraday) structure is in a confirmed UP-Trend as evidenced by the sequence of higher swing highs and lows – that’s the first place you start when analyzing price structure.

Second – of immediate interest – Gold has a tiny ‘polarity price’ near $1,750 which is where we are at the moment. It will be very important to see if gold can maintain the upward structure and thus rally higher off $1,750.  If not, we’ll see lower potential support targets on the 15-min chart.

Third, price reversed/retraced into the “Fair Value Area” at $1,800 which was the Consolidation Point (apex) of the prior triangle trendline pattern in September.  This is a good example of how price can turn-around at prior “Fair Value” (consolidation) areas.

And finally, I’m showing the 3/10 Momentum Oscillator with recent positive and negative divergences highlighted, and you can see the subsequent price reaction AFTER these divergences.

Main idea – the negative divergence into the $1,800 “Fair Value” area was enough to turn price lower, heading towards lower support targets at the moment.

Speaking of lower support targets, let’s drop to the 15-min chart to see the short-term Fibonacci areas to watch:

I like including lower timeframes so you can see the structure – namely divergences – clearer.

Take a moment to study the three big (multi-swing) negative momentum divergences that preceded short-term retracements (these are good spots to take profits off the table if you’re a short-term trader).

I drew two recent Fibonacci Grids, starting with the mid-October low and early November low.

These grids overlap at $1,727 or roughly the $1,730 level for easy reference.   Otherwise, the closest short-term level is $1,742.

Though not shown on the intraday charts, the rising 20 day EMA rests at $1,730 as well so we’ll keep our attention focused on the $1,730 confluence to see if price holds and bounces off this level (confirming the bullish intraday structure) or else breaks through it on its way to $1,700 (which would be an unexpected set-back for the buyers/bulls).

Take a few moments to study these good examples of divergences and price retracements/resolutions on the intraday frame.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Stocks and Crude Oil performed well in October, breaking critical weekly (and of course daily) resistance levels to shift the dynamic to the buyers.

Let’s start with the weekly chart of Crude Oil and focus on the key price levels to watch going forward:

In the bigger picture, Oil – like stocks – benefited from the inflation generated by the two prior rounds of Quantitative Easing (QE1 and QE2).  One would logically assume a third round of Quantitative Easing – should it begin – would also be supportive for oil prices.

Back to the charts, oil broke through a confluence EMA barrier at the $90 level in October, bringing us firmly above the $90 confluence.

Beyond the EMA confluence, oil broke through a falling overhead trendline which shifted the trend structure back to the bullish case.

Without getting too detailed, oil is in “open air” bullish territory so long as price can remain above $90 which has even more support as we can see on the daily chart:

I’ve annotated the chart more then normal so let’s take it one step at a time.

Starting with the downward Fibonacci Retracement grid, price broke above the 38.2% level at – surprise – $91 in October and now challenges the 50% overhead retracement at $95.50.

Further bullish strength above $95.50 would be expected to carry price to the upper 61.8% level which forms a price confluence from a prior swing high in July.  $100 is thus your simple upside target.

Otherwise, the flat 200 day Simple Moving Average resides at $95.00, and $95 has been a “price polarity” level (you can see price forming both support and resistance there).

I mentioned the ‘floor of support’ at $90 which is enhanced by the rising 20 and 50 day Exponential Moving Averages clustering there.

Ok – main idea:

Further strength above the $95/$95.50 confluence could result in a movement up to the $100 level (‘open air’ on both the daily and weekly chart), while a quick turn-around (retracement) here would be expected to challenge the support again near the $90 confluence.

This is somewhat similar to the structural ‘range’ resistance levels in the S&P 500 at the moment.

Going beyond the immediate range between $90 and $95:

A breakdown under $90 would be a very bearish sign just as a firm breakthrough above $100 would be a bullish trigger.

Watch these objective (non-biased) levels in conjunction with new/real-time developments along the way.

Corey Rosenbloom, CMT
Afraid to Trade.com

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After a stellar October, the US Equity Markets have paused briefly between two main bracket (confluence) levels.

Let’s take a quick look at these levels on the daily chart and use these for trade planning:

Let’s drill down to the simple levels and you can build plans from there.

After triggering a terribly violent Bear Trap in October, resulting in a large “Popped Stops” short-squeeze all the way up, price traded into the 1,300 target and then pulled back from there to the lower support zone.

So, as it stands now, the Daily S&P 500 shows MAJOR (short-term) confluence support from 1,200 (round number) to 1,220 (price and 20/50 EMAs).

1,220/1,200 will be the floor the Bears will be watching and will likely jump in aggressively short UNDER 1,200 (could see 1,100 again).

On the upside, we have two levels to watch, with the first being the 200 day Simple Moving Average (a key reference) at 1,273 and then above that is 1,300 (round number).

Though you can’t see it above, there’s a major horizontal “Polarity” Trendline at 1,295 which held as reversal support and resistance through 2011.

As simple as possible – 1,200/1,220 is confluence reference support (bear under; bull above) while the 1,270 but mainly 1,295/1,300 is confluence reference resistance (bull above; cautious beneath).

Though the numbers are different, the logic is the same on the Dow Jones (below) and NASDAQ:

The Dow has its confluence support from 11,600 to 11,700 (price and EMAs) while its upper resistance is 12,000 (200d SMA and ’round number’) along with 12,300 (recent high).

An upper breakthrough could lead to an impulse to 12,800 or 13,000 while a lower breakdown under 11,500 could revisit 10,800.

Sometimes it’s helpful to pull back to look at objective price levels like these and build bull/bear strategies from there, depending on how price acts/reacts at these levels.

Corey Rosenbloom, CMT
Afraid to Trade.com

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Following up with the Inter-market charts at the beginning of November, let’s take it a step further and quantitify the levels of volatility – using Standard Deviation Bands – of the S&P 500, Gold, Oil, and US Dollar Index.

Let’s start with the S&P 500 Standard Deviation Band Chart:

First, a little explanation about what we’re seeing.

Traders are familiar with Bollinger Bands, which draw two standard deviations (in a band) above and beneath the 20 period average (mean).

These charts built on that logic and add 1, 2, 3, and 4 Standard Deviation Bands – also known as “Sigma Bands” – from the same 20 day moving average (mean).

The general rule is that periods of high volatility (range expansion) tend to be followed by periods of low volatility (range contraction/compression), and we can use different indicators – like Deviation Bands – to quantify volatility.

The Average True Range along with Keltner Channels are another good way to quantify volatility.

The general rule for high volatility markets is to reduce position size and increase both targets (to play for) and stop-losses (a tight stop in a volatile market will get you nowhere).

In this sense, we adjust our strategies and position sizing to match – or at least accommodate – changes in the volatility environment.

So what we’re looking for is the current Standard Deviation Band levels along with the distance between the two Standard Deviation Bands, also known as “Bollinger Bands.”

The Red Levels in the chart reflect the 1, 2, 3, and 4 Standard Deviations BELOW the mean/average while the Green Levels reflect the same bands ABOVE the mean.

The Blue Line is of course the mean, or 20 day simple moving average.

Jumping right in, the current distance between SD +2 and SD -2 is 146 points – that’s clearly higher than the longer-term average, as it reflects the day-over-day 15% rise from October 4th to October 28th.

Interestingly, the S&P 500 reversed down from the Second Standard Deviation level near 1,290 – that’s the main reason to use Bollinger Bands (find ‘over-extended’ price swings that are more likely to reverse than continue over-extending).

And currently, the S&P 500 bounced solidly off the rising 20 day SMA (blue) at 1,217.

Notice how the S&P stayed between the 1st and 2nd SD Bands during the recent swing up – that’s always interesting.

Now, let’s take a quick reference look at Gold, Oil, and the Dollar:

We’ll move quickly through these charts – once you understand the logic of what the volatility bands mean, it’s just a matter of referencing where price is in relation to the current bands, where it’s been (and any interesting facts/inflections), and what the current 2 SD Range is.

For Gold, it’s $151 between +2 SD and -2 SD – that’s higher than normal, but less than the difference in the run-up after July and then in the ‘crash-down’ in August, but still to some traders, ‘moderately high’ is still  too high.

Oil similarly reversed down after traveling between SD +1 and SD +2.

The current distance between the two upper and lower Bands (Bollinger Bands) is $15.50.

Finally, the US Dollar Index – which generally trades inverse (opposite) of commodities and stocks – rallied sharply UP off its lower SD Band at 74.86 after the Yen Intervention Monday.

With reference to the “Bollinger Band” distance of 4.15, this level of volatility is at one of the highest levels of 2011 (the chart covers the entire year so far).

Use these charts as a reference for both historical and current volatility norms for 2011 and adjust accordingly.

Corey Rosenbloom, CMT
Afraid to Trade.com

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With the sharp rise in volatility in the cross-market landscape – mainly driven by Greece’s bailout then walked-back with the surprise announcement of a referendum vote – let’s take a quick look at where the current intermarket landscape resides at the moment.

Click for larger image.

To recap, Thursday (October 27th) gave us a positive resolution of the Greece situation, and the cross-market landscape took on a sudden “Risk-On” environment.

This was coupled with an announcement of 2.5% GDP Growth in the United States, which greatly decreased fears of a “Double-Dip” Recession.

Those were your two “Double-Whammy” bullish news stories among other headlines of the day.

Fast-forward to Monday, October 31st where the Bank of Japan intervenes to force the Yen lower (seen best in the chart of Gold and the US Dollar Index above).

Also on Monday morning, we learn that prime broker MF Global has declared bankruptcy and was barred from the trading floor.

And overnight – going into November 1st – we receive word that Greece has decided to hold a referendum on the bail-out package, which was an “out-of-the-blue” event that sent traders selling first and asking questions later, driving a sharp and severe “Risk-OFF” trade which is where we open November.

With quick commentary on the charts above:

Oil remained stable, compressing between $92 and $95 over the last week only to collapse this morning

The S&P 500 experienced a sharp rise – driven by US GDP and Europe’s announcements – only to see the rise evaporate this week

Gold rose sharply above $1,700 into $1,750’s target and sold-off on the Yen Intervention and is declining further today (“sell first, ask questions later”)

Bonds (not seen in the four charts above) rallied higher after an initial sell-signal as  yields fell (“Risk Off”)

Finally the US Dollar Index, after triggering a sell-signal under 76, reversed with the Intervention from the Bank of Japan, and further benefits from a “Risk-Off” environment and the harsh sell-off in the Euro on fears Greece might reject the bail-out plan.

The current market is driven to a larger extent than normal by headlines and volatility remains high – and volatility doesn’t just mean “downside action” – we’re seeing violent moves to the upside AND the downside, making it worth-while to adjust accordingly which often includes reducing position size and dropping to lower timeframes than normal.

Be safe.

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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