Which Way is Gold Headed

Apr 9, 2008: 9:18 AM CST

Although commodities recently were recently featured in the news due to their stratospheric rise, you may not be aware now that since that media blitz, these commodities have fallen in price. The “Sell the news” strategy strikes again!

Let’s look at the current conditions of Gold prices and Crude Oil Prices:

Gold prices peaked above $1,020 an ounce, and the news was full of stories of gold soaring even higher which caused little gold ‘trade shows’ to pop up to appeal to everyday people. Euphoria and fears of scarcity, along with a compelling story, can often precede large sharp sell-offs that confuse the public who participated or at least felt convinced that prices could only go higher.

Afterwards, gold surged down in two impulse waves down to $880 per ounce (falling more than 10% in 3 days) and then set-up a classic “bear flag” trade which retraced 50% of the impulse (Fibonacci) and also found key resistance at the falling 20 period moving average. That would be a ‘sweet-short’ set-up.

Price got its downside target following the bear flag and then retraced to form a potential new bear flag which has set-up currently and may also achieve its target just above $860 per ounce. Notice the key overhead resistance formed by the confluence of the 20 and 50 period moving averages. That would be a logical place for futures (or ETF traders) to place a stop, but it is also unfortunately an ‘obvious’ level so be careful there.

Another word of caution for the shorts – notice the slight positive momentum divergence that formed. That could limit the absolute gain (target) of the bear flag’s measured move. Divergences are warnings, and do not inherently reflect a trend change. The trend on the daily chart is now confirmed as down.

Another word of warning comes from the weekly chart:

Gold has significant potential support just beneath the $900 per ounce level due to the sharply rising 20 period moving average. This could also limit any potential further bearishness in the commodity.

Also, notice that what looks absolutely bearish on the daily chart (confirmed downtrend, large volatility moves down, bear flags) is actually little more than a clean and stable retracement on the weekly chart. In fact, one could even make an argument for the current levels to be a buy based on the structure of the longer term charts (increasing momentum, solid uptrend, pullback to support).

The lesson to take away is that you should always confirm your analysis with higher (and perhaps lower) time frame annotations. Also, when something looks so obvious that it appears too good to be true, it probably is.

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