2/27/2012 SPY #5

S&P 500 (SPY)

The S&P 500 just hit a new 3 years high @ $137.53 this afternoon and the Dow is back above 13000 again. Honestly, I think this is a fake out rather than a break out. Europe hasn’t gotten themselves out of the turmoil yet and the G20 just refused to raise the international lending for Europe this morning. With the uncertainties going on, I personally don’t see any reason for all these optimisms in the market.

In the daily chart, I prefer to bet on the short side considers there isn’t any real good news happening in the market. I think taking a small position to sell short here is viable because of the DOJI (second to the last bar, white bar) and the resistance level @ $137.47. A DOJI refers to a price bar that opens and closes at the same price; and when it appears at the top of the trend, it is usually a signal of reversal. Unless a price bar opens above the DOJI’s high @ $137.2 or a wide range bar that lifts the market up to another level, otherwise the DOJI will still be in play. Besides, I also see a resistance @ $137.47 coming from a head & shoulders pattern’s neckline back in May, 2008. I expect the S&P to flip around the 1^st resistance @ $137.47 then goes into a direction, which is hard to anticipate with current setup. However, if you sell short at current price @ $137.16, the 1^st resistance @ $137.47 will be your risk, which is $.30 cents away. I think the strength of the 1^st resistance is minimal, it’s more like a reference level rather than a reversal point. Comparatively, the 2^nd and 3^rd resistances @ $140.43 and $142.55, which were the shoulders’ top and the head respectively, are better resistance levels since the S&P spent longer time in 2008 consolidating between these 2 levels. If you don’t want to be too aggressive, entering a short position at the 2^nd resistance @ $140.43 is a safer trade. Your risk will be the 3^rd resistance @ $142.55, which is only 2 points away. While your risk is limited, you want to put your target out at the shoulders’ support @134.69, which is 5.5 points away from the 2^nd resistance @ $140.43. With a risk & reward ratio of 1-to-2.5, don’t you think this is a good deal?  

In the hourly chart, you can see the S&P continues to trade up in the channel from last post. To trade this on an intra-day basis, it is better to wait until the S&P hits the top boundary of the trend or the pivot resistances @ $137.83 or $138.54 before you get in the market shorting it. If you look at the 15 minutes chart, the S&P seems like a half done dome shaped rounding top. Because rounding top is a bearish pattern, this is also part of the reasons why I said shorting the market at current price is a possible trade in the previous paragraph. You should expect the dome shape to be completed around the Intra-day support @ $135.79 within this week. Furthermore, the price actions also give me some hints, the market pushed the S&P to the high @ $137.53 for less than 15 minute today and then the sellers immediately came in squeezing out the buyers, pushing the price down to where it was trading before it broke to the high. If the S&P wants to continue in the uptrend, it needs to make a distant higher high above the previous peak @ $137.19 to shake out the majority sellers in the market. However, I think the slow up move will eventually exhaust the optimism the fuels the move; the S&P shouldn’t break the top boundary of the uptrend channel or go any higher than the 3^rd resistance @ $142.55 from the daily chart.

Of course, if you don’t want to short the breakout, you can get long but your risk & reward ratio will not be as great as the short position. In the 15 minutes chart, you can get long at the flat base 2^nd support @137.04 but then your risk level will be either at the 1^st pivot support @ $136.1 or the intra-day support @ $135.79. Either way, the long trade has at least $1 of risk while not knowing how far the up move can reach. An optimistic target for the long trade will be the 2^nd pivot resistance @ $138.54 which is about 1.5 point away from the entry @ $137.04. The risk & reward ration here is 1-to-1.5, a ratio that is less than 1-to-2 is deemed as a bad trade. Nevertheless, if you get in the long side, the intra-day support @ $135.79 or 1^st support @ $135.52 are viable options to set your stop loss depending on how much risk you want to take. And make sure you don’t let the S&P breaks below the bottom boundary of the uptrend channel; once the channel is broken, it is a clear signal for the sellers to come in and smash the price down.     

        

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.

2/26/2012 OIL #3

Light Sweet Crude Oil Future (/CL)

Hi guys, the oil future had a big rip last week, so I figure I should write an update on the recent move. First of all, I believe the recent moves were mostly speculations concerning the possibility of Iran closing the Strait of Hormuz, which will block the passage of about 35% of the seaborne oil shipments or 20% of oil traded worldwide. I think there is still room on the upside but it shouldn’t last long until the oil price begins to retrace because of buyers’ exhaustion.

In the daily chart, I throw in a Fib retracement study to find out how far did price retrace since it hit the 2011 high @ $114.83. If you remember the double bottom I mentioned in the last post, you can see the 2 valleys of the “W” pattern is sitting a little below the 78.6% retracement level @ $76.77 and bounced. I think this is Fib retracement study is a very good example for those who don’t understand what’s the purpose of the study. Every time, price caught a little bounce at each retracement level while it was moving down from the high. I usually use these retracement levels as reference gauges for supports and resistances. And you can also see the oil price had been ranging between the 38.2% Fib retracement level @ $95.51 and 23.6% Fib retracement level @ $102.29 for the past 6 months until the recent upside breakout.    

For the breakout, I am looking at the price to retest the 2011 high @ $114.83, which is 4.5 points more on the upside. Because these are speculation moves, I don’t think there will be enough strength to break the 2011 high @ $114.83, so short selling the oil future before it reverses has a better chance to profit instead of chasing the trend and buying the heavy buy area. Furthermore, the breakout volumes on the last several bars were only about average or even less, indicating there weren’t a lot of buyers participating in this market, which lead me to think the move is largely attributed to speculation and there weren’t enough “real” investors involving in the oil market to back the continuation move. That’s why I think the move is not sustainable; and eventually when the move gets too over-extended, speculators will take their profit out of the market and oil price should experience a deep retracement to adjust its’ course of movement.

If you look at the second daily chart, I add two momentum studies, the Relative Strength Index (RSI) and the Slow Stochastic study, underneath the price chart to support my view. First, in the RSI study, index above 70 or below 30 is considered to be “overbought” and “oversold” respectively. Generally, when the index lands in either territory, it signals a potential reversal in the price movement; if the RSI is in the overbought area, stock price has a potential to move down, vice versa. Last year when oil price hit the high, the RSI reached its’ high @ 75.51 in the overbought area; soon after, price reversed and the RSI dropped back to the neutral zone. Now, the price hasn’t reached the 2011 high @ $114.83 yet but the RSI already made a new high @ 78.275, going deeper into the overbought zone, this gives me a signal of potential drop in the near future. Second, the slow stochastic study operates in a similar manner. The Oscillator above 80 or below 30 is indicated as “overbought” and “oversold” respectively. On top of this, there are the bullish and bearish divergence of the %K line (Green line) and %D line (Red Line) to indicate the set-up for future reversal (but I don’t see any divergence signal in the stochastic study as of right now so I can’t cover it in this post) . Recently, the oscillator reached the “overbought” zone and there is a resistance level @ 97 right above them, signaling a potential price reversal. Since both studies give an “overbought” indication and my chart drawings shows that price is about to encounter some heavy resistances, therefore I think betting on the downside is better than the upside

To trade this, I think short selling the oil future contract at the high @ $114.83 is the safest way to do since your risk will only be 1 or 1/2 a point, the only question is will the oil price goes back to the 2011 high or reverses before it reaches that level. In the second daily chart, oil price should be able to rise up to the 78.6% Fib extension level @ $111.43 considering oil price had a deep retracement of 78.6 % after hitting the high in 2011. If you sell short at $111.43, your risk will be the 2011 high @ $114.83 and look for any target between the previous range resistance level @ $103.38 and support level @ $95.1 from the first daily chart. I also have a 50-day moving averages (dark grey line) @ $100.34 sitting between the support and resistance level. If price retreats and reaches the 50 SMA before reaching the levels I mentioned above, you should cover at least 50% of your short position because the 50 SMA often provide good support for the price from falling unless the strength of the move is strong.     

In the hourly chart, I put in a few more levels from last week’s moves. The resistance @ $110.46 comes from the consolidation when oil price was at this high last year and, at the same time, this is also the first resistance from the pivot point study, therefore, I think the oil price will congest here for several bars, or half a day. Noticing the second pivot resistance @ $111.17 is only $.3 away from the 78.6% Fib extension level @ $111.43, therefore I believe $111.43 is a good entry point to sell short if you don’t want to wait until price hit the 2011 high @ $114.83. However, you should remember the high is where your risk locates; you can average your position up to the risk level but you have to cover it if price rises another point from the 2011 high. Target wise, any of the underlying support levels will do depends on how long you want to stay in the trade and how much confidence you have in the short position. For me, I prefer to cover 50% of the short position at the 4^th support level @ $107.96 and by the time oil price drops to the 4^th support level, the 200-hour moving average (white line) should rise to somewhere between the 2^nd and 4^th support levels @ $105.58 - $107.96. Same as the 50 SMA I mentioned in the last paragraph, cover another 50% of the short position, which is 25% of the original position, when price reaches the rising 200 SMA and ride the rest down to the 1^st support of $104.66.           

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.

2/18/2012 XLF #3

SPDR Financial Selected Sector Fund (XLF)

In the daily chart, the XLF cleared the interim resistance level @ $14.17, hit the immediate target @ 14.62 and it is running into a range consolidation. If you look at the consolidation area about 8 months ago, I think the XLF is going to do the same thing, ranging between $14.62 and $15.67. And I think this range is going to last until some major news breakout, whether it is the bailout in Greece or Moody’s rating reviews on the banks. Within this range, I use the peaks from the previous consolidation as reference to mark the minor resistances @ $15.19 and $15.4, the XLF may reverse or congest at these resistance levels temporarily. If you are going to trade this range, you can use the range top, target #3/resistance @ $15.67, as target if you wish to profit the whole range, otherwise the minor resistance levels @ $15.19 and $15.4 can serve as target points too. On the other hand, you should never let the XLF breaks below the range bottom, which is the immediate target @ $14.62; set your stop at this level and be ready to get out of your position when it breaks.

In the hourly chart, the XLF broke out from the down channel and found some resistance @ $14.78; even so, I think it is going to continue on the up move. If you pay close attention to the hourly chart, you will realize that the XLF is doing the exactly same thing it was doing about 3 weeks ago. Price first hit a resistance then it slowly channeling down until it bounced on the uptrend line (in green) and broke to a new high again. If you look at the second hourly chart with the Fibonacci studies, the first move retraced to the 61.8% Fib retracement level @ $13.87 and bounced, extending to the 100% Fib extension level @ $14.74. Now, go back to the first hourly chart. I drop another Fib retracement study for the second move and I find the XLF retraced to the 61.8% Fib retracement level @ $14.37 and bounced again. Since the first move retraced 61.8% then extended to 100%, I expect the same move will occur again here. Therefore, I throw in a Fib extension study in another chart (not shown here) to locate the 100% Fib extension level @ $15.19. Coincidently, the 100% extension level is also the 1^st target/resistance level @ $15.19 in the range of last chart, so I think the target/resistance level here is promising. Nevertheless, I think the XLF still has to clear the 6 months high @ $14.87 before it can go right to the target; otherwise, as I mentioned in the last paragraph, use the range bottom @ $14.62 as risk, get out of your position when the range is broken.

In the 15 minutes chart, I see a right angle broadening formation-descending pattern (RABFD) combined by the downtrend line and the resistance @ $14.18. The XLF just broke out from the RABFD last Friday; to the upside, you can use the overhead resistance levels I mentioned in the previous charts or you can use the following formula:

[Highest peak (A) - Lowest valley (B)]/2 + Breakout price (C) = Target

($14.87 - $14.39)/2 + $14.79 = Target @ $15.03

Instead of $15.03, I would set the target @ $15 since it is a whole number. That means you can either set the target at one of the resistance levels in the range, which are $15.19, $15.4 and $15.67, or the calculated target @ $15. Risk wise, I prefer the same range bottom @ $14.62 from previous chart.

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.

2/13/2012 SPY #4

S&P 500 (SPY)

In the hourly chart, I adjust the previous channel. Instead of a parallel upward channel, both boundaries are now closing in and form a cone shape that is tilted to the right. As the channel gets narrower, a breakout is going to happen. Ever since the S&P broke through the shoulder top resistance @ $134.69, price movement was quite choppy for day trading. But I notice the gap top @ $133.75 is holding up pretty well even with the S&P gapped down last Friday, it was still trading above the gap support, therefore I think the gap support level @ $133.75 is a good risk level. Monday morning when price gapped up in the pre-market, the gap from Friday was immediately filled and the gap play was over 2 hours into the trading hours. The Monday morning gap wasn’t hard to see its’ coming because the S&P formed a diamond pattern on Friday. Even if it wasn’t the gap that brought the S&P price back to the resistance level @ $135.54, it would have spiked up to the same price level during market hours. For the upside target, set it at the 52 weeks high @ 137.18 or you can use the upper bound of the channel because the S&P will find some resistance along that line.

At the current level, I see multiple patterns are being developed from recent price movement. Other than the diamond, I see an inverted head & shoulders pattern and a double tops pattern. However, the later 2 are contradicting each other in nature that the inverted pattern signals a possibility of upward breakout while the double tops’ breakout is signaling a break down. Regardless, one thing for sure is both patterns have a resistance level @ $135.52, either a neckline for the inverted head & shoulders or the peak level of the double tops, therefore I think it is a promising resistance level. I will map out the patterns later but you have to decide which pattern you want to believe in or neither of them.

The 15 minutes chart here is a bit messy because of the gaps, I apologize for that. Monday morning the S&P gapped up in the pre-market, tried to fill it upon open but failed, ended up testing the resistance level @ $135.52 again. Now that you see the S&P can’t fill the 3^rd gap here, you can use the gap top #3 @ $135.11 as support and if price break below the level again, look for it to reach the gap bottom @ $134.4. What's more, you can also see how the light blue uptrend line started 10 days ago switched side on Friday; it was a supporting line but now it turned to resistance, use it as a reference for setting target.

Including the pre-market price action, you can see the S&P developed into an inverted head & shoulders pattern in the last 3 trading days. Since the inverted shoulder tops’ level @ $134.73 is very close to the original shoulder top resistance @ $134.69 in the hourly chart, therefore I use the later number for both patterns’ shoulder for simplicity. And I mentioned earlier, the inverted head & shoulders neckline @ $135.54; the neckline is a fine resistance considers it is only 5 cents away from the 30 days high @ $135.59. If the S&P breakout on the upside, add the vertical difference between the head and neckline to the highest point of the pattern to locate the target, which the formula is:

135.52(B) – 133.85(A) + 135.72(C) = Target @ $137.39

You should notice the target is really close to the 52 weeks high @ $137.18, if you wish to cash out earlier, you can always use the uptrend line as reference to set target since it will be a resistance to the upward move. For risk, normally I would use the inverted shoulder top level @ $134.69, however, it locates at the middle of the gap so I prefer to use the gap top support @ $135.11 from the previous chart as risk.

On the other hand, if you want to bet on the downside, here is a double tops pattern for you. You should notice the S&P tried to break the resistance @ $135.52 for 4 times, if the valleys between the 1^st & 2^nd peaks and 3^rd & 4^th peaks can go as low as the middle valley (the lowest one), I would call this a quadruple tops pattern and it would be a strong down signal. The proper way to trade this is to wait until price drops through the confirmation level @ $133.86 and the following bar opens below the level then you short sell the S&P. In this case, your target will be the next support level @ $133. However, this way you will give up all the gain from current price @ $135.21 to the confirmation level @ $133.86, which is $1.35/share potential gain. Therefore, I think getting short at current price is better because of the better risk and reward ratio. Using the resistance @ $ 135.52 as my stop, I only have $.31 cents risk and I get an extra option to cover my short at the confirmation level @ $133.86; when everyone is getting in, i will be out of the trade profitably.

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback. By the way, happy valentine’s day.

2/11/2012 OIL #2

Light Sweet Crude Oil Future (/CL)

Since we stepped into 2012, the oil price has been trading down steadily but it is still sitting well within the range @ $95.1 - $103.38. Although the Right Angle Broadening Formation-Descending (RABFD) pattern from last oil post is still valid, it hardly provides any signal considering the recent price movement. Even if price breaks to the upside later on, the breakout can’t be counted as a RABFD pattern breakout since the pattern is incomplete. As a side note, price also broke the uptrend line (green dots) I previously drew but you can see the uptrend line provided some support before price cut below it.

In the hourly chart, you get a better picture of the downward channel. Price touched each side of the channel for at least 3 times already, I'm suspecting a break off from the channel is happening soon, most likely to the upside. If you pay attention to recent news in the Middle East, you will notice fear is mounting on the possibility of the Israel-Iran War. The war may not cause any immediate shortage of oil, but the news is going to be a catalyst to the upward breakout move. From the technical perspective, I think the move is on the upside because of the strength of the underlying support levels @ $95.1 and $96. This may be a bit hard to see on the chart, but, if you can bring up the chart, you will find most of the drops were relatively sharp, the entire move completed in a few price bars and left a long tail at the bottom of the red bars. Those tails gives me a little hint about how other market participants are reacting to the price move. The long tails indicate that buying interest in the market was still substantial, providing support in the mid $90s area. Besides, the range bottom @ $95.1 should give a firm ground for oil price to stay above. I also see a double bottoms formed around the 30 day low area. Despite the fact that the run is already exhausted, the 2 valleys of the “W” pattern can use as a support level, which is at $96. The confirmation line, which is the tip of the middle peak, is another usable support/resistance level, I set the level at $97.84.

If oil price breaks out on the upside, use the preceding peaks as target levels @ $101.3, $102.24 and $102.98 or the range top @ $103.38 depending on how much risk and reward you want to take. Of course, the more profit you want to take, the more risk the move will inhere. I personally would suggest using the trailing stop method (see 1/19/2012 XLF post for more detail) for profit taking because it can lock in profit while not scarifying the potential of more upside gain. In terms of risk, the confirmation line @ 97.84 should be a decent risk level since price bounced off this level for 4 times in the last 30 days. However, for the same reason, if it goes back to that level again, the chance of the level will hold may diminish because other market participants may see it as an “old” level and less players will participate in it. I like to set my risk at support level @ $96 better, but you should make your own decision whether you want to take the confirmation line as a risk level. On the other hand, if price doesn’t break to the upside, I expect price action to enter a congestion period. Before the market decides where it wants to go, it will probably use the confirmation level as a center line and flips around it. If this is the case, use the support level @ $96 as risk level and don’t let price goes anywhere below the support level @ $95.1. The $95.1 level is an important gauge for the range, if price breaks the level to the down side, a sell off is very likely to follow.   

On the 15 minutes chart, oil price developed into a double tops pattern in the last 3 days. The pattern was confirmed when price drop through the confirmation level @ $98.23. However, the performance of the breakout run fell short and reversed soon after the pattern was confirmed. Nevertheless, I add 2 more levels in this chart for short term swing trade. I am pretty sure oil price is going to test the double tops’ peak level @ $100.1 again. The only question is where will it go afterward? If price continues to go up after reaching the double tops’ peak level, use the same strategy I laid out in the last 2 paragraphs. If it reversed upon reaching the level, then it should develop into a triple tops pattern. In this case, expect price drops down to the double tops confirmation line @ $98.23 and wait for the downside run when the pattern is confirmed. 

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.

2/6/2012 SPY#3

S&P 500 (SPY)

Last week, couple major news came out: first, Fed chairman Ben Bernanke announced that he is going to keep the interest rate low between 0%-.25% until late 2014; second, unemployment rate dropped to 8.3%, the lowest since February 2009 and beating the estimates on the Street; and third, the ISM index hit an 8 month high, indication shown both the manufacturing and service sectors are growing at a faster pace. Overall, I think the economy is gaining momentum to the upside, the rally should continue for a certain period of time, at least until the upcoming US presidential election in early November. Meanwhile, inflation rate, while falling, is sitting 1% above the target of 2% and Bernanke also claimed that he wouldn’t scarify inflation rate target to boost employment, therefore I think QE3 is not coming anytime soon. As of right now, the economy is moving back on track at an increasing pace, I don’t see any reason for the Fed to inject more liquidity into the economy at the moment, which would fuel the inflationary risk.         

Alright, let’s starts off by reviewing last week’s hourly chart. In the hourly chart, the support level @ $130 turned out to be a good support; the S&P bounced right back into the up sloping channel continuing the rally. Recently, the S&P hit a new 6 month high @ $134.62, which is 7 basis points away from my target @ $134.62. I'm expecting this to retreat to the bottom of the channel then bounces again, but there is also chance that it may find a solid ground at the gap (top) support level@ $133.75 depends on the market sentiment. But do keep in mind that the down side risk is at the channel bottom or the gap bottom @ $ 132.83. If it breaks both the channel bottom and gap bottom, gives the market time to consolidate and find a direction before jumping in again. In long term, I think the S&P will definitely test the shoulder top level @134.69 again and it may push as far as the 52 weeks high @ $ 137.18. You can also use the channel top to locate your target, just make sure the risk & reward ratio is worth to trade.

In the 15 minutes chart, the S&P gapped up 2 times last week and trading within another up sloping channel. Although price is channeling up, I don’t think this channel is legit mainly because the price movement is a bit too skippy and too much white space exists from side to side. Further, the channel is too steep to maintain, I doubt such kind of sharp price movement can’t sustain for long, especially in a short time frame chart. I will use this channel only if I want to keep my trade brief and the risk tight. Comparatively, the gaps are better tools for this trade. The first gap is @ $131.44 –$132.13 (Gap #1) and the second one is @ $132.83 – $133.75 (Gap #2). The tops and bottoms of both gaps should serve decent support levels. Right now the Gap #2 top @ $133.75 is the first support level the S&P going to encounter, remember that once it cuts below gap # 2 top, price will always try to fill the gap by reaching the gap #2 bottom @ $132.83. Like last week, S&P gapped down from $131.82 to $131.08 in the morning, it slowly moved back up during the day and finally filled the gap when the market opened on the following day. In the current situation, if the market is going to head down, don’t try to hold on to the losing position from one gap to another, cut loss decisively; you can always buy it back at the gap bottom if it is trying to fill the gap on the downside.

Here is an example of how I would play the gap. If price retreats back to the gap #2 top @ $133.75, don’t jump into a short position right away, wait for a confirmation to happen. Confirmation occurs when: (1) a price bar (triggering bar) breaks below the gap #2 top level; and (2) the following price bar (confirming bar) opens underneath it. That’s the signal to a short selling position. If you wish to be a little more conservative on this trade, add another 2 conditions to the previous 2 before you take on a position: that is, (3) the confirming bar has to hit a lower low and (4) close lower than the previous triggering bar. Notice that, adding another 2 conditions will scarify the potential of larger gain, but since everyone has a different risk tolerance, pick whichever way you are comfortable with. Once I'm in a position, the gap #2 bottom @ $132.83 is my primary target and if the momentum is strong, I would cover half of my size @ the first target and let the rest runs down to the gap #1 bottom @ $131.44. In terms of risk, I would use the top of the triggering bar as risk. However, if you are willing to risk more to prevent pre-mature stop out, you can also set the risk at the top of the bar precede to the triggering bar.         

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.

2/5/2012 GOLD#2

Gold Future (/GC)

In the daily chart, gold price finally broke out of the descending triangle on the upside and retreated off the resistance level @ $1751.8 before the weekend. In terms of investing, I think the gold price has a good chance to retest the resistance area between $1751.8 and $1766. Due to the choppiness of price movements between the resistance level @ $1751.8 and all time high @ $1923.7, I throw in a Fibonacci Extension study (more explanation in the next paragraph) to locate the resistances in between. What’s more, these levels should be decent targets to aim for, especially the 61.8% “golden ratio” level @ $1817.8. For downside risk, I would use the downtrend line as the risk level; if price drops below the trend line and the next price bar opens underneath it, you should get out or at least thin out 50% of your position immediately because it will most likely retreat to the key support level @ $1546.5 before it breaks out on the upside again.   

The Fibonacci Extension study is different from the Fibonacci Retracement study that I used in previous posts. The use of Fib retracement study is to find the depth of retracement (the “2” move in the picture above) but the Fib extension study is used to find how far can price extend once it reverses out of the retracement period (the “3” move). According to one of my colleagues who uses the Fibonacci studies as his main trading tools, if stock price retraces 50% on the retracement study, it usually extends to the 50% level on the extension study; and if it retraces 61.8%, it will most likely extend to the 100% level. So far, he is right on the reversal and exhaustion points quite often but I never test this out in my own trades, mainly because we have different trading styles and we don’t trade the same symbol (try this out if you want and let me know if it works for you). For me, I don’t dig that far into the Fib studies, I just use the Fib retracement to find or confirm my risk level and the Fib extension to locate my target if I don’t find any overhead resistance available like the daily chart above. Nonetheless, if you simply want some tools for long term investing purpose, I think these 2 studies in combine should serve you quite well.

In the hourly chart, gold price recently dropped out from the upper channel (refer as channel #1 hereafter) and looks like it is heading toward the lower channel (refer as channel #2 hereafter). If you are swing trading, I don’t think this is a good time to get in a position because it is stuck in an indecision area between the 2 channels. As long as it is trading within the indecision area, even if the price is trending up steadily, I still don’t recommend to take on a position considering gold is quite sensitive to news event among commodities, any major breaking news will immediately reflect on the gold price, I would call gambling instead of trading. If you are in a position right now, you better keep your risk tight at either the 38.2% Fib extension level @ $1714.2 or the support level @ $1703, cut loss if necessary.

However, if the gold price does move out of the indecision area, whether it moves to channel #1 or #2, the boundaries on either channel will be a reference to position taking. In the near future, I think gold price is more likely to break into channel #2 and rebound on the support level @ $1703 rather than directly moving back up to channel #1 from its current stand point. The flat base @ $1703 is the lowest point since the channel shifted up about 2 weeks ago, it should provide some support before the price hit the lower bound of channel #2 or even lower. Notice that I'm also using the 23.6% Fib extension level @ $1650 as a risk level as well. High volume peaks and valleys are always better support/resistance because the high volume indicates that market participants are seeing those levels as key levels, once the price triggers these levels, everybody gets in the game or put on more size causing the volume to spike. In this chart, you can see the volume on the upside breakout move is about 3 times the average volume, therefore, I mark the top and bottom of that move as resistance and support respectively, which they are also the 38.2% and 23.6% Fib extension levels. This is not a coincidence, this implies that a lot of people are using the Fibonacci studies to decide their entry and exit price as well, therefore you see price stalls around those levels.

On the other hand, if gold price goes right back to channel #1, it is better to wait until it clears the resistance level @ $1751.8 before you get in a position. Once the lower bound of channel #1 crosses the resistance level, the 50% Fib extension level @ $1766 will come into play immediately, therefore I seen this as a double resist region. Unless pessimism overwhelms all the good news out there recently and pushing everybody back to the gold heaven, otherwise I don’t see any reason for it to push through 2 resistances in a row and make a new 30-day high in near term.

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback. And guy, let me know if you want me to do a post on particular symbol, I will be more than happy to help.