The Forex Chronicles

Gold Looking Overbought Around $1300

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Previous Price Action

It is a long time since I talked about gold, but in my last post back in October, I highlighted the upwards price breakout that had just occurred on this particular commodity, and this proved to be a decisive breakout.

I remember saying at the time that I wasn’t really convinced about this specific breakout, but I turned out to be wrong because the price did indeed continue to creep higher in the following months.

This is primarily because people turn to safe havens in times of crisis, and November and December saw some of the biggest stock market falls on record.

As a result, the price of gold currently stands at $1283 at the time of writing, having previously traded close to $1200 for long periods of time.

Future Price Move

The stock markets have actually bounced back in recent weeks, and as a result of this, people have been selling gold to buy stocks, pushing the price down slightly.

After trading close to the $1300 level, which is an important round number, and therefore a key resistance level that needs to be broken, it has since fallen back to $1283, as mentioned above.

However I still think there is a possible trading opportunity here.

Gold Price Chart - 8 January 2019

Trading Opportunity

It is still too early to predict where the stock markets are headed because a continuation of the downward trend could be just around the corner, but I still believe that the price of gold will struggle to break through the significant $1300 level.

Therefore it might be worth looking for a clear reversal signal on the daily chart of this particular market for additional confirmation.

If you look at the price chart above, you can see that we have just had a downward MACD crossover, which is often seen as quite a strong reversal signalby itself, but I personally would be looking to enter a short closer to $1300 if possible.

Ideally I would like to see a pin bar on the daily chart because if the price pushed up towards $1300 once again, but ran out of momentum a second time before breaking lower, this would be the perfect time to go short.

So at the moment we just have to wait and see if this particular scenario plays out, but as always, I want to point out that these are just my own thoughts and opinions. This doesn’t represent professional financial or trading advice in any way.

Gold Price Breakout – October 2018

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Previous Price Action

The price of gold has been trading in a sideways trading range for the last few months, struggling to break decisively above or below the $1200 level.

This can be seen in the chart below because you can see that the price has been trending within the upper and lower trendlines for many weeks now.

Gold Breakout - October 2018

It seemed that there needed to be a catalyst to move the price strongly upwards or downwards to break out of this range, and last week’s stock market mini-crash provided this catalyst.

Safe Haven

In times of uncertainty, people often sell some of their stocks to preserve their capital and invest it into something a little safer and less risky, and gold is often seen as a perfect safe haven for this cash.

Therefore it was no surprise at all that the price of gold surged higher last week after the big sell-off because this happens fairly regularly.

As a result of this increased buying, the price of gold broke upwards out of this trading range, and is currently trading at $1232 at the time of writing.

Trading Opportunity

If you are someone who likes to trade price breakouts, you probably would have entered a long position at the close of the breakout candle, and would now be in profit slightly because the price has continued edging higher at the start of the London session.

Indeed the breakout candle closed at $1223, so this breakout trade is already $9 in profit at the time of writing.

I myself didn’t really like the look of this breakout because there was a very large breakout candle, and when this happens you will often get quite a large pull-back, and are then sitting on a loss, and sometimes the breakout quickly runs out of momentum.

Furthermore, I thought that there may be limited upside from here because the EMA (200) currently stands at $1245, which is likely to act as a strong resistance level.

There are some breakouts that look ripe for a trade, and others that are a little unconvincing, and I would say that this latest gold breakout is still a little unconvincing, which is why I will not be trading this breakout at any point, even after it broke higher today.

The reason why I say that is because we have already seen a slight recovery in the stock market, and there seems to be a little support right now that is holding the price of the major US markets up.

So if the markets do happen to bounce back this week, which could happen, this will likely have the opposite effect on gold, and the price may well fall back within in the previous trading range.

This has turned out to be a good breakout trade for those that had the courage to trade it, particularly if they have already moved their stop loss up to break-even because it is now a risk-free trade, but I never really felt that this was a high probability set-up.

I am prepared to wait for high probability set-ups where the odds of success are much higher. The price of gold could easily touch the EMA (200) and possibly break through it, but it’s no problem at all if this occurs. It’s just something you have to accept as a trader.

Gold Continues To Trade In Narrow Range Around $1200

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Death Cross

If you are a regular reader of this site, you will know that I recently posted about the death cross that has just occurred on the weekly chart of gold.

This is basically where the 50-period moving average crosses below the 200-period moving average, and is generally considered to be a very bearish signal.

Since then the death cross has been confirmed, but it hasn’t resulted in a wave of sellers using this as an opportunity to drive the price lower.

This is not unexpected because these weekly signals can take a long time to unwind, but if you drop down to the daily chart, you will see that the price is really struggling for direction right now.

Narrow Trading Range

In recent weeks the price seems to have been glued to the critical $1200 level, and has struggled to break decisively above or below this significant round number with any real momentum or conviction, as you can see below:

Gold Narrow Trading Range - September 2018

So far this month it has recorded a low of $1187.8 and a high of $1214.4, but has remained in a very narrow trading range for several weeks now.

Inside Bar

In addition to trading in a very narrow range, we have also had a series of three consecutive inside bars in the last three trading sessions (if you include the Sunday session), which is always worth noting because these inside bar patterns will often present you with a profitable breakout opportunity when the price closes above or below the initial set-up bar.

Trading Opportunity

From a trading perspective, it is very hard to trade any instrument that is basically trading sideways with no clear direction, but it is still good to see such a pattern because it usually leads to a profitable set-up when the price eventually breaks out of this range.

This is particularly true when you have a series of inside bars within this sideways trading range, as is the case here.

Therefore it might be worth watching the price of gold in the coming weeks because there could be a strong price move when the price closes above or below both the set-up bar and the previous high or low of this trading range.

A downward break would arguably be preferable because we have already seen a death cross on the weekly chart, and there could subsequently be a lot of downside potential.

Nevertheless, an upward price breakout could still be worth trading because there is always the potential for the price to move back towards the 200-day exponential moving average or the 100-day exponential moving average, which currently stand at $1253.9 and $1228.3 respectively, before heading south once again.

The point is that these sideways trading ranges and inside bar formations can be very profitable to trade because in many cases the longer it remains in the range, and the longer the price trades within the initial set-up bar, the bigger the breakout once the price closes outside of this range.

To demonstrate this point, you only have to check out these two inside bar range breakouts that occurred on Bitcoin and the GBP/JPY pair last month.

Death Cross on Gold (Weekly Chart)

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What is a Death Cross?

A death cross occurs when a short-term moving average crosses below a long-term moving average, and is significant because it often signals the start of a new long-term bearish trend.

Traders will often use different time periods and different moving averages to find these downward crossovers, such as the 50 and 100-period simple moving averages (SMAs), for example, but 50 and 200-period exponential moving averages (EMAs) seem to be the most popular.

As always, these crossovers are more significant on the longer time frames, such as the daily and weekly time frames, and for that reason I want to alert you to a new death cross that is occurring right now on the weekly gold chart based on the EMA (50) and EMA (200).

Previous Price Action

Gold traders may already be aware of the death cross that has occurred on the daily chart of this particular commodity during the summer. If not, here is the daily price chart that highlights this downward moving average crossover:

Gold Death Cross - Daily Chart

You can see that the death cross occurred during June and resulted in sustained price falls during the following months as traders continued to close long positions, sell gold and actively short this commodity, helping to drive the price down from around $1300 per ounce to just $1160 per ounce.

Since then the price has bounced back to the $1200 level and seems to have found support around this level, but ultra long-term traders may be interested to know that there is a new death cross forming on the weekly chart, which suggests that the price could still go a lot lower.

New Death Cross on Weekly Price Chart

If you look at the weekly price chart of gold, you can see that the 50-week exponential moving average is crossing below the 200-week exponential moving average.

Gold Death Cross - Weekly Chart

This in itself doesn’t necessarily guarantee that the price will drop a lot further in the short-term. It may well rebound in the next few weeks and come back to the EMA (200) because the price has already fallen heavily in recent months.

However the long term implications of this death cross could be significant because in the past these crossovers have resulted in some long and sustained price moves, both to the upside (in the case of a golden cross) and the downside.

Therefore it could be argued that the price of gold could potentially fall to $1000 or lower in the coming months if traders act upon this weekly death cross and continue to drive the price lower.

So it will be interesting to watch the price of gold over the course of the next few years to see if this is a significant death cross or whether the price continues to trade in a sideways range.

Trading Opportunities

I wouldn’t necessarily recommend that you actively trade these death crosses, particularly on the weekly time frame. Nevertheless they do present opportunities because you can take note of this long-term trend and look to open short positions on any pull-backs.

For example, when the death cross is in force on the weekly chart, you might want to wait for pull-backs on the daily price chart and look for opportunities to open short positions where appropriate (downward breakouts from peaks, heavily overbought conditions, strong resistance at round numbers etc).

(If you would like to trade gold, AAAFX and Ayondo are two brokers that generally offer low spreads on this commodity).