Sunday, August 12, 2012

Weekend Update (Gold)

The weekly close above $1,620 was an important bullish development near term in my opinion. What is so significant about this weekly close?

If you look at the price action the prior eight days on the 30 minute chart (left hand side below) you can clearly see that an overwhelming majority of trades were placed beneath the $1,620 price level. What makes this significant is because futures have a "long" and a "short" for every contract of "Open Interest". The bulk of contracts that were placed on the short side the past eight days are losing money. If these short term traders in the "new" open interest are using leverage, they will begin to second guess their bearish view over the weekend and especially with another move higher early next week. Every down tick from here brings hope, and as they get near breakeven, they may decide to close out their trade. To close out a losing short position, you must buy.

Let's take a step back for a second. From early April 2012 to early May 2012, there was a prior level of support in gold around the $1,620 price level. Weeks of a prior support level being tested is the main reason why this became such a strong resistance level lately in my opinion. It is overhead supply that keeps a lid on price after a support area gets broken down. Now we have plenty of underground demand beneath, and it is why I feel this level may now act as strong support once again.

Should horizontal support hold, each new weekly high going forward will crush the hopes of those traders holding on for a return to their entry price on the short side. If these traders add to their losing position with additional selling, each new tick in the adverse price direction brings an increasing level of stress as the losses begin to multiply. It doesn't take too many mistakes to blow up a trading account that uses leverage. The sharks know another swimmer will take their place. It has been happening for over a hundred years and I doubt this psychology will change much going forward.

Keep in mind this is "near term", I am talking about a 30 minute chart pattern, but these principles apply to all futures markets in all time frames.

I have mentioned repeatedly that I had no interest in buying gold or putting on a long position in gold for the intermediate to long term for quite some time. The probabilities were not on my side in the weekly time frame in order to do so, meaning the risk has been too high for me. Those who have been regularly reading this blog know exactly where I stood and have been informed of the pricing patterns in gold early.

More important developments need to be pointed out from my view. Gold is now at the new multipoint major trendline resistance on the daily chart going into next week. I used a blue oval at the blue trendline to point this out, see right hand side below. I would like to see gold punch through here as early as possible, certainly prior to $1,620 failing to act as support. I expected a potential surge in price when resistance failed at $1,620, and gold flew into this trendline resistance at $1,630 pretty quick.

Beyond that there is the major trendline resistance on the weekly chart where I have drawn a solid grey trendline that forms the upper boundary of the "Descending Triangle". It looks to be around $1,660 now but it gets closer with each passing day that gold appreciates. The larger degree timeframe traders dominate the price action and I am most interested in trading the smaller degree timeframes when these traders see the same opportunities that establish the order flow.

Going into next week my trade plan is to day-trade conservatively on the long side in gold as long as the $1,620 level holds as support. A breakout of the blue triangle pattern to the upside increases my chance of success. I am taking profits at targets as long as gold is beneath major trendline resistance. This is not the time to date or marry a trade with my methodology.

(Click on chart expand)