Gold About to Show its Hand

08/24/2009 10:22 am EST

Focus: COMMODITIES

Corey Rosenbloom

Founder and President, Afraid to Trade

I’ve been reading some interesting commentaries on gold prices and expectations recently, but let’s step back to the basics and take a look at the lengthy triangle consolidation formation and note key levels to watch on a potential break.

Gold Annotated Chart


Click to Enlarge

A quick glance shows us why moving averages are irrelevant in a tight coil or trading range (such as the triangle). In a range, we’re looking to buy overbought and sell oversold levels, such as a tag of the Bollinger Band, overbought/oversold oscillator, or most appropriately, the upper or lower trend line tests as these become evident.

Notice even that the 3/10 momentum oscillator is converging between +10 and -10.

Notice also the candle wicks or formations that have formed at each test. We have examples of hammers/shooting stars, dojis, bullish/bearish engulfing, etc. These help confirm that a price turn is likely and help trigger entry (particularly when price closes above or below a key candle).

Let’s take a closer look at just the price triangle formation.

Gold Simple Chart


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The implication with a triangle formation, particularly a symmetrical triangle as this is, would be to wait (stay neutral) until we get a confirmed breakout up or down from the coil (triangle) and then try to play for a momentum or impulse (trend) move out of consolidation.

Do not try to be a hero and predict the resolution (breakout) of the triangle in advance. The edge comes from playing a range expansion move for a large target with a stop on the opposite side of the trend line, meaning that if price broke upwards, your stop would be $10 or so beneath the lower trend line.

Click here to check out some additional examples of triangle formations.

If we take a purist approach, then most traders like to take the height of the triangle and then add (or subtract) that from the breakout zone.

In this case, the height would be roughly 200 points (1,000 minus 800), which would be added to $970 (giving us an upside target of $1,170) or subtracted from $930 (giving us a downside target of $730).

Remember, plenty of other factors are at work in pricing gold, but these potential targets and structures come from the triangle pattern that is so popular in technical analysis.

Let’s keep watching to see which way this triangle will break!

By Corey Rosenbloom of AfraidToTrade.com

 

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