So here is what I see on the long term gold price. I believe the underlying trend is still on the upside, the down move we are currently experiencing is a retracement of the breakout from mid-July. If you look at the monthly chart, gold price has been steadily rising since 2005. In the weekly chart shown here, gold price made a perfect example for a stair stepping Elliot wave; it bounced to a new high with a less than 50% retracement consolidation whenever it touched or came close to the uptrend line.
Gold price broke out in early-July, remember that was also the time when the US default controversy started, followed by the Greece’s bailout and the Europe crisis we are still trying to solve right now. The Western hemisphere was in distress, any kind of quantitative easing or bond purchasing program would flood the market with money, thus depreciating the value of the currencies . People fled the USD and Euro turning to Gold as a better save heaven. We had a 10 weeks run to the all-time high at 1923.7 since we broke the major resistance at 1546.5.
So that was a very brief review for you to know what was going on and what caused the gold price to shoot up. Enough hindsight trading and let’s move on to what I’m looking at.
The major resistance level (1546.5) in early July will become the major support level, combining the downtrend line, it formed a descending triangle (white space). Normally, 64% of the time a descending triangle breakout downward; however, when price rise into a descending triangle, it’s a 73% chance to breakout upward. Furthermore, when the triangle occurs at the top of the trend, it performs better.
In the daily chart, I dropped in a Fibonacci retracement study from the 52 weeks low to 52 weeks high. If you look at it closely, you will realize each Fib level served a decent support and resistance on its way down from the top. Especially the 61.8% (1543.9) level, which also referred as “the golden ration”, always serve as a solid level and about 70%-80% of times price bounces off it; this is also part of the reason why I marked 1546.5 as a major support here.
On the downside, I found the 2nd support at 1484.5 and the 3rd support at 1326.1. I don’t like the 1326.1 level, simply it’s too far away from the current price level, I prefer 1440.6 as a more reasonable 3rd support level because it formed a double topped pattern from March to April 2011 and it is also a Fib level. Personally, if I bought the contract at current price, 2nd support (1484.5) is the farthest I would let the price goes against me. But different people have different risk tolerance, just make that you can bear the consequence and act decisively when necessary.
To the upside, I think the short term target is 1751.8. Normally, resistance is found at the downtrend line, but price touched the downtrend line for 4 times already so I would expect a breakout upward as it approaches the end of the descending triangle. If it does break, minor resistance is expected at 1751.8 and heavy resistance at the all-time high 1923.7 and 2000 (it’s a whole number). If price goes right through the 52 weeks high the following formula should help to find the target price:
(Peak of Triangle – Bottom of Triangle) + Breakout price
This formula works 71% of times and if you want to boost up the success rate, divide the height of triangle by 2 before you add to the breakout price, this should bring the success rate up to 90%.
I hope I am able to provide you some insight here and please let me know if you have question or suggestion to help me improve. Thank you
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