One of the markets which receives constant attention is gold. Along with oil it is a market normally reported as opposite to Dollar. By that I mean it is blamed for USD weakness, or a reason behind any gains the green buck might show. Especially over last few months, virtually nobody in the media looks at, or discusses, fundamentals of gold. It is always covered in relation to movements of Dollar, as if there was nothing else moving the market. On top of that, XAU-USD relationship has taken on the chicken and egg dilemma- impossible to tell which market is the leader and which the follower. Not any different from how oil-dollar are treated by the media.

I don’t trade commodities very often, and this blog covers even fewer of these trades. Couple of months ago I closed a longer term gold-silver trade with good results. Perhaps time is right to consider another trade in this commodity. Unlike the previous occasion, when bases for entering the market were in favorable gold-silver ratio, this time around it is longer term chart and nothing else. And no, I’m not taking any XAU-USD relationship into account, other than the simple fact that the metal is priced in Dollars.

In early October gold completed very large consolidation pattern, which started in February 2008. Weekly chart is used for analysis, hence the extended time scale. Finally, market closed the formation by breaking above 1030 level. From there market proceeded higher without much hesitation.  Last week price reached almost 1230 level, and reversed sharply, closing the period at about 1160, sizable correction on smaller time frames. Combined with all time price high, this behavior has possibility of creating a blow out top.

These type of patterns are not often found on weekly charts. Early in the year we had great examples of blow out tops/bottoms in British Pound crosses. All of them brought good trades. I think current situation in gold also has good potential. After making a serious of new highs, price created shooting star candlestick formation, high probability pattern if considered the large time frame, extended nature of the trend, new historical highs and recent acceleration of price appreciation, as if panic driven buying. In this type of environment, chances for reversal, or at least large correction, are increased.

Normally sell order would be placed just under the low of last candle or about 1145. However, I have one concern regarding this formation. Last candle, while large, about $80 weekly range, could be a little bigger. I’d be more comfortable in the volatility was even higher, with $110-130 range, closer to historical extremes. Since it isn’t, I’m adjusting entry to 1134, to under the low of previous candle. That one was of a spiky nature and should prove important. Breaking it would be very encouraging and one could expect the price to fall under 1000, perhaps as low as 950-960 in short order, few weekly bars.

There is never a guarantee market will do what we expect, so stop is just above high of latest candle, or the shooting star. Should price continue higher, sell orders will be moved up, trailing lows of most recent weekly candles. That is if the parabolic run goes on. Set up described here is dependent on this type of price behavior, because it has tendencies for fast and furious corrections, at least in early stages. It is possible that market could settle into some kind consolidation pattern, in which case strategy will be revised. For now, though, good size pull back is very possible.

Mike K.