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.
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