Gold: The Breakouts Just Keep on Coming

10/12/2009 10:15 am EST

Focus: COMMODITIES

Gold has been able to hold its recent gains in a very convincing fashion, maintaining a comfortable distance above the $1,000 mark. Here’s a brief look at some of the technical aspects surrounding the latest series of price channel breakouts on gold’s weekly chart. While past trading activity is no guarantee that the current move higher will continue to outperform, there are a few similarities between the current breakout and the one that occurred in September 2007.


Click to Enlarge - Graphic credits: Metastock v.11

First off, please realize that there isn’t anything particularly special about the number 55, other than it happens to be part of the Fibonacci series (1,2,3,5,8,13,21,34,55, etc…) and that it helped form the basis for the Turtle Traders’ original long-term trend following system from the early 80’s. That said, it appears to work reasonably well at catching major breakout moves such as the two shown on this chart. For best results, however, certain other technical dynamics need to be in place, among them being:

  • A flat base, platform, or similar period of price consolidation, one marked by steadily decreasing volatility
  • Steady to rising money flows, both on a short- and long-term basis

If you can locate a potential breakout setup that features both of these essential chart dynamics, your trading results will likely be much better than if you attempt to trade such breakouts as part of a mechanical, “black-box” campaign of system trading.

This chart doesn’t show money flow, but I have plotted the Bollinger Bands (set at two standard deviations away from a simple 25-period moving average) in a separate window at the top of the chart. You’ll notice how powerful the September 2007 channel breakout was, as it came in the aftermath of an unusually narrow range in the Bollinger Band complex. The price of gold literally exploded higher after a wide-range, 55-week channel breakout bar with the weekly ranges steadily increasing for nearly six months after that occurrence.

An enduring high printed in March 2008, followed by a major commodity rout that brought gold back toward $700. More recently, the Bollinger Bands narrowed significantly, printing the narrowest ranges since the epic September 2007 bull run. Not surprisingly, after periods of low volatility come high volatility, and the ranges of the weekly price bars are beginning to expand (also reflected in the widening of the Bollinger Bands) in the wake of the latest series of price channel breakouts. The trend followers in the audience might also appreciate the Metastock Intellistops (red dots plotted on the chart). These are the long-term trailing stops that are included in version 11 of the software. They appear to do a great job of allowing traders to stay with a trending move without giving up inordinate amounts of profit. They’re currently showing a stop-loss price of $975, by the way, and, once plotted, will automatically adjust to the price action on the chart with each subsequent data download.

Will gold embark on another major weekly trend move now, similar to the six-month run it had in late 2007 and early 2008? No one knows, but with gold also breaking higher on its monthly chart, such volatility and price breakouts shouldn’t be taken lightly. The remainder of 2009 should be anything but dull as gold seeks to move along the line of least resistance, which, by all technical and fundamental measures, appears to be toward higher ground.

By Donald W. Pendergast Jr. of ChartW59.com

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