Trading Gold

Chart patterns look at the big picture to identify signs of future price movements. Using price history, most technical analysts and traders derive valuable information and probabilities for success and failure in the decision to buy, sell or hold an underlying asset.

Chart patterns consist of trends, consolidations, reversals, support and resistance levels and other key data that allow traders to compute entry levels, place stop and profit targets as part of critical trading information. Traders look for these patterns for its repeatable nature and forecasting value in the charts. 

Successful pattern trading requires the knowledge of pattern formation, its arrangement and statistical likelihood. The recognition of multiple patterns in multiple time frames, and patterns within patterns and its body of knowledge of how to react and what to expect, helps a trader to succeed. Traders benefit by using the confluence of multiple patterns, support and resistance levels as entry and stop levels to trade the best probable patterns that fit their trading and risk styles.

Like all stocks and commodities, gold can be traded from a technical or fundamental perspective. And like many markets, gold responds better to some patterns than others. Here are a few forming in recent market activity.

Parabolic Arc Pattern (Long-Term Pattern)
We discussed this pattern before (see “Trading Parabolic Arc Patterns”  MODERN TRADER, November 2016).  Parabolic Arc chart patterns form when a steep rise in prices is caused by irrational buying and intense speculation. Parabolic Arc patterns are rare, but they are reliable and are generated in mega bull trends. These patterns trend gradually making higher highs and lower lows in the beginning stages, but can be volatile in the exhaustion and reversal stages. Parabolic Arcs are reversal patterns and have a very predictable outcome. Although these patterns are predictable, they are relatively difficult to trade since the market sentiment is bullish and it may be fairly tough to pinpoint reversals to trade. Most Parabolic Arc patterns have a significant correction of more than 50% of the price rise (from the top).  Once price reaches this critical  support, price tends to move up to reverse the downside correction. The current gold chart suggests such a reversal pattern. 

Gold rose from below $300 in 2001 to $1,986 in 2011 in a Parabolic Arc pattern. Since 2011, gold reversed its uptrend and retraced to its Parabolic Arc projected target range ($1,064-$1,240). Gold reached a low of $1,075 in December 2015. Currently, gold has moved higher and continues to trade above its 200-month moving average. After completion of a four-year Parabolic Arc correction and consolidation, gold may be seeing its next wave higher towards $1,530 to $1,637 (50% to 62%) in the next 24 months (see “The long arc of gold,” below).

Gold’s ABC Bullish Pattern (Weekly)
The ABC Chart pattern and its related AB=CD Chart Pattern are prime examples of “Symmetry” in the markets (see “Trading ABC Patterns,” MT December 2016). These “Harmonic” patterns help traders to identify buying and selling opportunities in all markets and in all time frames. 

The ABC and AB=CD patterns are first described by H.M. Gartley in his book Profits in the Stock Market. The main advantages of trading harmonic patterns are that they allow traders to determine risk vs. reward ratios beforehand as they forecast key market turning points and profit targets. The ABC pattern can be a continuous or reversal pattern and it is shaped like a lightning bolt. 

Gold bottomed around $1,075 in December 2015 after a prolonged downtrend. Gold formed its “AB” leg (A pivot at $1,075, B pivot at $1,403) in 2016. A reversal after a retracement of 80.44% of the “AB” leg formed “C” pivot in December 2016 (see “The ABCs of gold,” below).  

This reversal completes the “ABC” pattern. Since forming the C pivot, gold traded above the ABC bullish pattern entry level ($1,203) to trigger a long trade. The stop loss is placed at $1,139. The first target is $1,342, the next target levels are $1,467 (100% AB) and $1,555 (127%). Gold reached its first target range in September 2017.

Gold vs. Mining Stocks
One of the popular indexes to watch for gold investors and traders is the Gold Bugs Index (HUI) which consists of a basket of 15 gold mining stocks.  The index is positively correlated to gold.

Traders compare HUI to the price of gold to determine if gold is undervalued or if gold mining stocks are undervalued.

Historic evaluation of the key ratio of HUI to gold shows, when the ratio is 0.32 or higher, gold may be undervalued compared to gold mining stocks; while when the ratio is below 0.32, gold mining stocks may be undervalued (see “Mining gold patterns,” above). The current ratio of HUI to gold is 0.16. This ratio suggests gold mining stocks may offer greater returns over gold during the next up wave in gold.