One of our regular readers was among the few who openly rejected the idea of Gold’s reversal to the upside, he sees a lower bottom for the metal.
So let’s see why I changed my mind and now think that we are not going to rocket higher soon. Below is my previous post’s daily chart. I've added remarks to the chart to show what went wrong.
Gold Daily: Post-Mortem
Chart courtesy of tradingview.com
I supposed that after we received the first bull confirmation of higher lows, we can fly higher at a distance of the 1.618 Fibonacci ratio in the green CD segment. One can notice that we hit a new high last Thursday around the $1192 level. So why should we cancel the bullish scenario now?
The thing about expectation and the reality, indeed the metal broke beyond the previous peak, but the following price action didn’t meet the expectations of an explosive soaring through the $1200 area.
Moreover, the price quickly drifted below the previous maximum point and almost reached the September high, negating all the bull efforts done before. I measured the CD segment ratio, and it is less than AB segment by distance which means that this so-called bullish "space jump" couldn’t even hit the previous attack, and for me it shows the weakness of the market..
I think now it is better to save the modest profit of almost $40 per ounce (current $1166.5 versus entry price suggestion of $1127) for future trades. For those who want to stay long, I would recommend closing your long position either below the September high at $1156 or the breakeven point of $1127, but a modest profit is still a better choice, I guess.
So what’s next? Below I prepared a time analysis combined with a simple support target to show my plan moving forward.
Gold Weekly: Another Bottom Is Ahead
Chart courtesy of tradingview.com
As you can see on the weekly chart above we are in the red wedge pattern sculptured by the January 2015 and the October 2015 tops at the upside and the November 2014 and the July 2015 troughs on the downside.
I prepared the time value chart for you to stress the period where we can reach a new bottom. For that purpose I measured the previous two falls from the lower high to the lower low. For your convenience I highlighted each drop by a grey dashed vertical line and each period’s duration is indicated below each period.
The first period from March 2014 to November 2014 took 33 bars (weeks) to smash the price down to $1130 from $1392. The second period lasted for less time, 26 bars. If we divide 33 by 26, we will get the magic Fibonacci extension ratio of 1.27 (very popular among Harmonic traders). Now to figure out our further time plan we can just divide the previous period (26 bars) by 1.27 and the outcome of the 20 bars (weeks) should be extrapolated from the last week’s peak. The week of February 29, 2016 (leap year) is our target for the new low. It also means that the Fed will postpone a rate hike if the chart is valid.
Now like on the maps, when we have the longitude (the time target) we should just find the cross of it by the wedge’s downside and come to the price target of $1019.
Smart medium traders can quickly calculate that the current risk/reward ratio favors shorts like the overall correction trend does. If we sell at the current $1166 level and put a stop right above Thursday's maximum beyond the $1196 level and keep the short until let’s say the $1072 level (previous low, conservative target), we will have a potential loss of $30 versus a potential gain of $124 or 1:4 – a very nice risk/reward ratio.
We will have the following parameters with the target at $1019: A loss of $30, gain of $147, a risk/reward ratio at an amazing 1:5.
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.