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Gold Falls Sharply: Opportunities Upcoming

In mid-January Gold futures (GC) broke higher out of a triangle pattern. The breakout proceeded through a number of resistance levels but remains short of the 1345 target discussed in a January 13 article.

January 29 is seeing a more than $30 drop, a 2.3%+ decline.  Despite the drop, the short-term outlook remains bullish. The pullback could present an opportunity to get long near the original triangle breakout point between 1220 and 1240.

Allow the price to stall (consolidate) in this area for at least a day, preferably two or more, and then buy if the price moves above the consolidation. Figure 1 shows how this could potentially look. The green circle marks the entry point.  The consolidation, if it occurs, could occur a bit higher or lower than depicted--the setup is the same though.

Figure 1. Gold Futures (April) Daily Chart

gold bounce.jpg

When this setup occurs it shows downward momentum has slowed, and the transition back to upside indicates gold could push higher in alignment with the short-term trend. Once the long is initiated, a stop loss can be placed several dollars below the low of the consolidation. While 1340 to 1345 remains the target (based on triangle), even a rally to 1300 is likely to present a high reward:risk trade with this type of setup.

If the price simply continues to fall back into the triangle then a losing trade is avoided.  If that occurs, the next spot to consider a long is between 1190 and 1180, along the rising trendline. If the price moves much below that, the longer-term downtrend may be re-asserting itself.

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