Gold has been a frustrating market for traders over the last several weeks…
It topped out at $1,837 on September 2. A week later (on September 9), it bottomed out at $1,721. Ever since then, gold has traded within this tight $116 range.
At the time of writing, gold was trading at $1,793 per troy ounce.
That means over the last two months, the price of gold has basically gone nowhere. And prices are currently in the upper half of the $116 trading range.
But, that would only be telling half the story…
That’s because where gold is trading right now is just as important as how it got there.
Many traders would think that because of its stagnant price, gold is in a rangebound market going sideways.
Sometimes, that’s the case.
Other times, however, you’re dealing with a trending market that has simply taken a bit of a breather.
Coming Up With a Plan
The strategies used to trade a sideways market versus a trending one are completely different.
Therefore, it’s important to understand what you’re thinking of trading.
In my opinion, the best way of accomplishing this is by examining a price chart.
Let’s start off with this price chart of gold chart below…
There are three key features to this price chart:
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Gold’s rebound up to $1,919 after bottoming in March 2021.
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The inverse head and shoulders pattern with the two shoulders and the head labeled.
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The three key levels where gold peaked, which can be used as upside targets (red dotted lines).
We’re using a bar chart today because it accurately represents the head and shoulders pattern.
I believe the strong rebound up to $1,919 from the lows this past March was the first wave of a new bullish trend in gold. And we can expect it to move higher going forward…
You might look at its recent action and argue otherwise. That’s why it’s important to note that markets rarely move in a straight line in either direction (up or down).
It’s far more common that a series of price peaks and valleys move together either higher or lower.
For example, just look at the decline in gold after peaking at $2,089 in August 2020…
Notice how prices would sell off for a few days and bounce… then they would sell off again, before bouncing once more.
Eventually, gold managed to work its way down to $1,673 by March 8, 2021.
So, if I’m right, and gold’s in a new bullish trend, then the decline from the $1,919 peak (lower red dotted line) should ultimately prove to be a counter-trend correction.
In other words, gold’s price is just experiencing some short-term weakness before getting ready to move higher.
That also means that the March low of $1,673 must remain intact if gold is going to move higher.
Keep in mind, that doesn’t mean you should rush out and buy gold immediately…
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First, we need to see confirming price action.
This brings us to the inverse head and shoulders pattern on the price chart.
The pattern can be considered complete if prices move above the neckline ($1,840). That would be the trigger I’m looking for to confirm that gold is headed higher.
And that’s where the key levels come in… You can use these key levels as upside targets.
If gold breaks above the neckline at $1,840, then the next target would be $1,919. If $1,919 is reached, then we can target $1,962 and so on.
If the neckline never breaks, then it’s no big deal. We’ll simply wait for another high-probability opportunity to take shape.
I’ll be keeping a very close eye on gold.
If the neckline breaks, I’ll be sure to let you know in another issue of Market Minute. And, if gold moves higher than the key level at $2,089, then I’ll update you with my next target for gold.
Best,
Imre Gams
Analyst, Market Minute
Reader Mailbag
Which direction would you argue that gold will move next?
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