Gold shows strength since October 2012; be mindful of false breakout or bull trap
It is very exciting to see Gold price break above July resistance of $1347 last night. By doing so it has created a bullish signal, one we have not seen in nearly 10 months. The price action will certainly bring about a change in market sentiment. It is also evidence that bull-bear balance of power has shifted in favour of bulls.
Question: Is it time to call a gold bottom? This was what I said in my July 16 posting:
The clearest signal we can get is a classical bullish reversal chart pattern but missing that, a big bullish expansion in the next fortnight or August will be a big plus.
Missing bullish reversal chart pattern
I am not entirely convinced that gold is going up from this point onwards because it has not printed any bullish reversal chart pattern. Bullish reversal chart patterns are typically double bottom, triple bottom or inverted head and shoulders. I have a lot of faith in these patterns because they are highly documented price phenomenon that have high probability outcomes. Without these, I feel uneasy.
Can price reverse without printing these patterns?
Certainly. Price may ‘reverse without reversal chart patterns’ when other factors become dominant drivers; technical levels become less important.
So what to do to reconcile all these input?
Be bullish but mind a bull trap; insist on entry after price retracement only
- No matter how bullish the signal is, buying now does not fit the adage ‘buy low sell high’.
- Because resistance is as high as $1360 (low of May based on line chart), a $12 move is not a persuasive break of the existing resistance.
- In fact, if price moves below $1347 in the next few days, the entire penetration that took place yesterday could be a massive ‘Bull-Trap‘ or false breakout.
- To avoid being caught in a bull trap, wait for price retracement.
- One method to look at entry is to wait for fibonacci retracement level calculated by taking June-low to yesterday’s high as the price flow.
- Other potential levels to look at are A. B. C. based on previously turning points.
- Entries at these levels are far superior to buying at high if support can be found.
- Lastly, be very mindful of all the potential overhead resistance levels and trend lines.
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.