Whither Gold?

I am currently reading Peter Brandt’s Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading(expect a full review posted in the next few days). I can safely, without even completing the book, that it has already improved my technical analysis, shown me the patience required to trade, and made me realize how much I still have to learn.

With Brandt’s book fresh on my mind, I decided to take another look at the charts for Gold and GLD (SPDR Gold Shares ETF).  My last Gold update was April 10th and the price has changed little since that update. However, there are some key chart formations and levels to emphasize while patiently waiting for the next move.

Gold futures and GLD are potentially forming an inverse head and shoulders pattern.  If ultimately confirmed this would be a bullish sign for the precious metal.  Confirmation would occur if GLD (for the purposes of the charts I will use GLD) broke resistance at the neckline.

A long position could be initiated now if one wanted to speculate that GLD will confirm the pattern (i.e. go up). A logical stop loss price in this case would be around $156.50 – failure to hold the right shoulder low around $156.50 would be a bearish sign and signal further downside. The other option would be to wait for further confirmation and initialize a short position at $156.50 or long position if GLD trades above the neckline:

You will also note in the chart above the long-term channel in GLD that I have repeatedly detailed. The weekly chart shows we have broken below the channel, but this is not the first small break below the bottom of the channel. However, a break below the right shoulder low could move us far enough away from the channel to make the pattern obsolete.

Fibonacci retracement levels on long-term (weekly or monthly) charts levels often coincide with key support and resistance price levels. The 23.6% fibonacci retracement level from the October 2008 lows to the September 2011 highs is closely aligned with the potential right shoulder (see below), adding to the importance of the $156.50 – $157.50 level on GLD.

Until we get a decisive move in either direction, this should be a fun market to watch in anticipation!

No current position in GLD

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