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Gold Prices: Fib Support Sets up Top-Side Reversal

Gold Prices: Fib Support Sets up Top-Side Reversal

2016-01-12 21:05:00
James Stanley, Strategist
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Talking Points:

In our last article we warned of a reversal in the down-trend in Gold prices after the two-month pain chain that sent prices reeling all the way from $1,190 down the $1,040’s. And reverse it did…

But just as we said in that last article, it takes more information for a trader to act on a reversal than an idea. We still need a setup so that the market can be addressed in a risk-first manner. No trend is strong enough for you to abandon your rules or trading plan because, over the long-term, markets are unpredictable. This lack of adherance to a plan can be a very costly thing. And further to the point, it makes it very difficult to actually figure out how to improve because you don’t know which behaviors to modify and which to focus upon.

On the topic of a plan and reliance on price action and technical analysis to furnish those setups, we may have such a situation in Gold right now. I’m going to be up-front in telling you that this is a counter-trend move that, frankly, could reverse at a moment’s notice. But this is always the case in markets. Traders are paid to take on risk. The key is taking on the right risks and doing it in an efficient manner.

In the Gold market right now, such a setup may be available right now. The basis for this is the long-term Fibonacci support at a price of $1,087.05. This level can be found by drawing a Fibonacci retracement around the ‘big picture’ move in Gold, taking the low of $253.30 and drawing up to the top in 2011 at $1,920.80. Doing so will give you a 50% Fibonacci retracement at $1,087.05, and this level has seen significant price action since Gold prices first touched it in July of last year. This same level was the basis for multiple short re-entries when Gold was on it’s way down.

We looked at an aggressive short setup off of this level on November 20th, and then another in early December after resistance had built, once again, off of this key fib level.

What has changed here is the Fed. After the Fed rate hike in December, price action in Gold has been making higher-highs and higher-lows. $1,087.05 was crossed again as prices shot higher in a bullish run on the back of risk aversion in the first week of the new year. This might continue. It might not, nobody knows – but that isn’t the point. The point is to look for risk-efficient setups and that’s what we may have here.

After bursting up to a new higher-high of $1,113.03 after NFP last Friday, prices have been pulling back. That pullback may have just found support at that same level of prior resistance, and when a level is relevant in a market this will often happen. This is a simple, but often effective price action tell, and traders can look at this as a chance to play the top-side of Gold with a risk-defined play.

Traders can look to play the continued reversal in Gold by lodging stops below support; the distance of which should be determined by how aggressively you want to treat the move. The more aggressive setup would be placing a stop below today’s low at $1,083.32. Slightly more conservative would be taking that stop below the nearest psychological level at $1,080. And even more conservative than that would be placing the stop below the prior July 2015 low at $1,071.28.

On the top-side, that previous high at $1,113 becomes a level of interest, especially for aggressive stops. There is a projected trend-line currently running around $1,120 and that could become another level of interest, followed by a 23.6% Fibonacci retracement from the previous major move at $1,127.03. Should prices move above $1,130, top-side targets could be seen at $1,150 and then $1,155, which is the 61.8% Fibonacci retracement of the secondary move in Gold, taking the 2008 low to the 2011 high.

Gold Prices: Fib Support Sets up Top-Side Reversal

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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