Gold Prices: Short Setup Available off of a Key Fibonacci Level

2015-12-07 18:39:00

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Talking Points:

Gold Technical Strategy: Looking at new short entry, last profit target met from previous short setup.
Gold caught an aggressive retracement on the back of USD-weakness after last week’s ECB announcement.
The longer-term down-trending channel set support as mentioned in our last article, and this can become a fresh target for new short positions moving forward.

In our last article, we looked at the continued down-trend in Gold prices that has seen the asset move lower by over 11.5% since mid-October. This was a brutal run that was driven, at least in-part, by stronger expectations for a rate hike from the Federal Reserve in December. As the Dollar continued strengthening, Gold continued selling off. But as we looked at in the last article, Gold was lower by over 11.5% while the US Dollar was only up by 2.8%; so we can’t quite say that all of the selling pressure in Gold was being driven by expectations for higher rates.

As we had advised in that previous article, Gold was running towards support of a very long-term trend channel that had capped the declines in July of this year, and Wednesday and Thursday of last week saw price action run right down to this trend-line. In our previous article, we cautioned traders to be careful of chasing to the down-side; not only did we have that trend-line support but we also had a relatively new psychological value come into play at $1,050 (we haven’t seen a sub-$1,050 print since February 5th, 2010).

But it was the European Central Bank meeting last Thursday that really started to form the current setup in Gold. As the ECB largely disappointed expectations, investors around-the-world jumped out of long USD bets, creating an extremely strong dip in the Greenback. This led to strength in Gold prices that continued on Friday of last week, and brought near-term price action right back to that $1,087.05 level that we’ve been talking about for the past few months. This is a very relevant level because it’s the 50% Fibonacci retracement of the ‘big picture’ move, taking the low in 1999 of $253.30 up to the high in 2011 of $1,920.80. But perhaps more to the point of near-term relevancy, this level has provided significant price action support and resistance since first being crossed back in July. In July, Gold prices were in a dead-drop and on July 20th, Gold set a new short-term low at $1,071.28. The next 12 days saw price action oscillate around this pivotal support level, with a series of ‘higher-lows’ coming into the market, indicating that buying support at this level was strong. Eventually, bears were outnumbered and bulls drove prices back up, eventually tagging that $1,190 level before the bears came back.

But on the way back down, we saw even more action come in at this level and we had written a Gold Technical piece with a special focus on this price entitled, We’ve Just Run Into a Major Support Level. Two weeks later and we’d seen Gold break through those lows and revisit this same price zone as new resistance, at which point we released ‘Gold Prices: Aggressive Short-Setup Available.’

The theme for the current setup is essentially a mirror image of that previous short-setup. With prices now catching resistance on a previous support level, traders have the opportunity to jump into short Gold positions with concentrated or controlled risk with the potential of huge up-side should the down-trend continue.

The key caveat here is going to be how aggressively the trader wants to push the short position. Since mentioning this setup in this morning’s Market Talk, Gold prices have already moved down by ~$5 already. This would make stops lodged above that $1,087.05 resistance even wider, which would mean more risk. The high from Friday is at $1,088.72, so traders should look to place stops above this level to ensure that they’re not taken out of the position unless a ‘higher-high’ prints on the Daily chart. For those that want to treat the move a little more conservatively, they can look to wedge stops above $1,100, which is a major psychological level as well as being just above the previous swing high (denoted on the below chart).

On the profit target side of Gold, traders would likely want to look towards $1,050 as this is a minor psychological level as well as being the previous low. Should $1,050 get taken out, look to $1,044 (previous price action swing low), then $1,025 (minor psychological level) and then $1,000-flat.