Gold Future (/GC)
In the daily chart, gold price tried to push through the 50% Fib extension level @ $1766 but the breakout on low volume didn’t allow the move to continue higher, leading gold price to drop back to the same price level @ $1693.7, where it broke out from the descending triangle in January, 2012. Notice that gold price bounced on the rising 50 day moving average (50 SMA, grey line) and, at the same time, the rising 200 day moving average (200 SMA, white line) is only about 30 points away at around $1675; with these 2 moving averages closely sitting below the current price @ $1712, I believe heavy support should be found somewhere between $1670 and $1690. The rising 200 day moving average will be the ultimate risk for any long trade I mention in the rest of this post, make sure do not let any price bar closes below it because if this happens, it is a signal of downward break out.
On the other hand, I see a broadening tops pattern. Broadening tops is neither a bullish nor bearish pattern, you always want to trade this pattern with the underlying trend movement when it is forming. To trade this pattern aggressively, buy the gold future when price bounces off the lower trend line and sell when it reverses at the upper trend line. If you prefer to take this trade safely, you want to wait until the future price reverses on either of the trend line before you get in a position and expect a breakout to happen; that means if you get long at the lower trend line, you expect gold price breaks out of the upper trend line and vice versa. Both trading styles aim for different purposes, the conservative trade profits from the pattern breakout while the aggressive one gets in from side to side in order to profit from the price swing. The later one requires good risk management to constantly adjust the price target and stop loss level with regard to price actions while the earlier one simply requires a trader to set a price target and stop loss level and let price runs to either level.
I think the broadening tops pattern offers a good trade base on the risk & reward ratio. If you get long at the current price level @ $1712.4, your risk is either the lower trend line or the 200 day moving average. Putting this in number, the risk level will at most be at $1670, which is 42 points downside risk. To the upside, if you use the upper trend line as target, I expect the next touch will at least be above $1800, which is an 88 points move. The risk & reward ratio here is about 1-to-2.1. Nevertheless, if you wish to gain more by trading the breakout, target can either set at the next overhead resistance @ $1817.8, which is the 61.8% Fib extension level, or you can apply the standard measure rule formula:
Height of pattern (A - B) + breakout price
= $1792.7 - $1688.4 + breakout price
= $104.3 + breakout price
According to the book “Getting Started in Chart Pattern” by Thomas N. Bulkowski, this formula works 60% of time. If I use the result calculated above and assume the breakout happens at $1800, target will locate at $1904.3, which is only 20 points from the all-time high @ $1923.7. Reaching this price target is not impossible but it will definitely take a much longer time to do so, therefore I prefer dividing the height by 2 before adding to the breakout price in order to get a price target at $1852.15.
In the hourly chart, gold price is forming an ascending triangle pattern. Ascending triangle is a non-directional pattern, therefore it is not recommended to trade it before a breakout happens. However, when the upsloping price trend is at the bottom, you normally assume an upward breakout to happen. Since the price movement is coming to the end of the pattern, I'm expecting a breakout to occur sometimes soon and this breakout trade should last about 2 to 3 days until the move exhausts. If gold price breaks the flat top @ $1726.6 on the upside, the standard measure rule used in the last paragraph works 75% of the time. The upward breakout target will locate at:
Height of pattern (A - B) + Breakout price
= ($1726.6 - $1688.4) + $1726.6
= $1764.8
On the other hand, if price broke below the upsloping trend line, the standard measure rule works 68% of the time. In downward breakout, you should sell short the gold future when price closes below the upsloping trendline and the price target will be at:
Breakout price - Height of pattern (A - B)
= $1726.6 - ($1726.6 - $1688.4)
= $1688.4
For the upward breakout trade, the upsloping trend line of the ascending triangle is going to be your risk level, which also means that the closer to the end of the pattern, the lesser risk you will have. And for the downward breakout trade, your risk will be the flat top resistance level @ $1726.6. Considering the risk & reward ratio, I think the upward breakout trade is a better one to take.
I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.
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