By Scott Pluschau
www.scottpluschau.blogspot.com
Gold finishes the week with a "high and tight" continuation pattern going into next week known as a "Bull Pennant", see one hour chart left hand side below. The chart work has been text book in gold for quite some time with the most recent being the breakout to the upside from a multipoint channel on the same one hour chart. What made the breakout from the channel so significant is that it took place above the prior "Major" trendline resistance of the "Descending Triangle" on the daily chart. Prior trendline resistance can act as support, see right hand side below.
In the big picture, the upside breakout of the descending triangle had a classic "Throwback" and when it took out the prior "swing high" it was goodbye on increasing volume.
This is the ideal "swing/position" trade setup for me which takes the risk of the smaller degree timeframe with the potential rewards of the larger degree timeframe.
The bears are clearly in a bad spot as I do not have a significant major resistance area that is noteworthy. Things can change, so it is always important to have proper risk management, trade management, money management, and position sizing.
Back in August I had mentioned on the blog multiple times that $1,620 was a key reference area in gold. Once that supply was run over by the ever increasing demand that continued to show in the chart, the probabilities were good for a strong move. The breakout from the distinct smaller triangle on the daily chart nailed its "Measured Rule" profit taking target today; (see the second gold chart below which also includes a close up view of the bull pennant on today's 5 min chart).
Measured rule takes the distance from the top to the bottom of a pricing pattern at its first reaction point, and adds it onto the breakout point. When the measured rule profit taking target gets reached it has a knack for shutting off the prior supply or demand in my experience. I am very interested in seeing how the pennant begins to play out Sunday night.
Let's look at some other aspects of the gold futures. If my math is correct, "Open Interest" has increased with the last three weekly Commitments of Traders Reports by a total of 56,302 contracts, which is what you want to see as a market enters a stage of vertical development (The tabs at the top of the blog have my interpretations of the COT Report and Open Interest). From a perspective of open interest this is very healthy for the trend continuing. Why do I say that? Because the "old" open interest of the contract on the losing side should be feeling financial pain in the world of leverage. When they begin to cover their positions, and if they are large, it increases the explosive potential as the shorts have to buy to close out their trade. Add that buying pressure to any continued increasing long positions and it's a formula for nasty consequences to the loser...
For me the big question has always been whether or not the losing side of open interest has weak hands or strong hands. This helps me determine what kind of "position sizing" I want to pursue in my trades.
The structure of the COT report in gold is not currently trending bullish. The bottom line is always price and volume so I wouldn't short this market no matter what. The trade plan going into next week is to either be conservative with my position sizing going long, or do nothing. Doing nothing means preserving capital for future opportunity.
Now if the "trend" in the positions of the commercial traders were net long over this period, I would be very aggressive in squeezing the shorts to death with every continuation pattern that developed, but the fact is the commercial traders have been piling on the short trades for the past three weeks. If my math is correct the commercial traders have gone net short over this period of time 75,446 contracts.
One thing is for sure I am looking forward to next week.
(Click on charts to expand)
A quick look at the Dollar Index shows it lost the neckline support of the "Cup with a Handle" pattern and another "Minor" support level on the weekly chart. There may be great swing/position trade opportunities to short the Dollar Index in the coming weeks.
The prior post on the blog that identified the triangle prior to the breakout is here: http://scottpluschau.blogspot.com/2012/08/weekend-update-gold_19.html
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Source: "Bull Pennant" forms as the "Triangle" target gets nailed in Gold:
