Gold Bullish Rally: It is Just the Beginning

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What Triggered the Rally in Gold?

Many traders were taken off guard as gold (XAU/USD) pulled out of its bearish misery and posted marginal gains, driving the price above $1,220 before correcting lower at the time of this writing. Many reasoned the immense rally in gold as a sigh of relief following the rejection of the “Save Our Gold” referendum (77.3%) that was held in Switzerland on Sunday but we are openly dismissing this theory. We do not believe a referendum that according to all the polls showed the NO camp has a clear majority is sufficient to create such bullish volatility in the precious metal.

Moody’s credit rating agency decision to downgrade Japan’s debt rating from A3 to A1 was the fundamental trigger for global traders to seek safe-haven in the yellow metal. When one rating agency downgrades a sovereign rating the rest are likely to follow. We are certain we will soon hear the opinions of Standard & Poor’s and Fitch on Japan but there is more to it. Based on our analysis, we believe China is next to be downgraded by the rating agencies following weak economic data. The downgrades often occur on Friday’s after the market closes. We therefore relate the great rally in gold as the market pricing-in the probability of future credit rating downgrades, which in the past drove Gold higher on safe-haven demand. As stops were triggered during the rally, the momentum sparked a heavy US Dollar (USD) selling across the board as noted in EURUSD and Crude oil.

Gold Technical Analysis

We have spotted the buying opportunity in gold early in the European session but due to the great volatility and limited time to act we alerted all our subscribers and posted XAU/USD chart to our twitter, highlighting the high risk for moderate gains.

Our Alert from the European Session

Please click on the chart to enlarge:

Gold Weekly Chart, 1 December, 2014

Gold Alert from the European Session 01/12/14

If you pay close attention to the chart you will notice the hammer that was painted several sessions ago. The recent selling gold (last week) provided a dip-buying opportunity with a protective stop loss order below the support. (we recommend using Google Chrome when viewing the charts).

Based on our analysis the gains in XAU/USD are far from over, it is just the beginning of moderate gains that have yet to come. In future rallies we would not expect crude oil (WTI) to trade inline with gold as it did in today’s session. To concrete our bullish projection for gold we turn to technical analysis.

Gold Weekly Chart

Please click on the chart to enlarge:

Gold Trading Strategy, 02/12/14

Gold Weekly Chart 02/12/14

The weekly chart shows the break outside the triangle that lead to the resumption of the downtrend after the price re-tested the breached support (bottom line of the triangle). The bullish hammer we discussed earlier warned of a possible uptick in gold’s price. The gains in today’s session were capped in what appears to be the beginning of a bearish channel (marked in grey). However, the hammer has yet to exhaust its full potential, which supports our bullish outlook for gold. We see the initial target for gold at $1,240, which we would expect to give way and reach $1,280. Once the secondary target has been obtained the gains are likely to fade, tuning in to the broader technical outlook as the selling may drive the price back towards $1,131 if not below, Of course, we will revise our trading strategy should the secondary target be met by the market.

Gold 4hr Chart

Please click on the chart to enlarge:

Gold Intraday Strategy, 2 December, 2014

Gold 4hr Chart, 02/12/14

As we cannot join the monthly trend, we turn to the 4hr chart to seek a possible intraday entry. Our range for executing a long trade in gold would be $1,180 – $1,190. Due to its volatile nature we have chosen $1,180 to be our entry for the long position, which is supported by the 100-Moving Average (MA, marked in pink). The protective stop loss order is layered below 50.0% Fibonacci retracement (in black) at $1,169, targeting $1,240 initially. We are not fans of entry orders but in rare occasions, this is not one them. The entry will be provided upon a re-test of $1,180 (4hr close) in which we will do our best to notify our subscribers when these conditions are met. The current weakness in gold is likely to attract ‘dumb money’ that may be swallowed by the market bulls when our trading strategy kicks into play. We invite you read our recent strategies in USDJPY and Crude oil. Updates on our strategy will be posted at the bottom of this page.

Should the precious commodity resume its uptrend before allowing us to enter the market, we would sit on the fence and observe how the small bears are being mascaraed by the market bulls.

03/12/14 UPDATE: Gold failed to retrace to 1,180 at the time of this writing. Failure to do so in today’s session may mean we will require to revise our trading strategy for the commodity.

04/12/14 UPDATE: Gold dipped to 1,192 before correcting higher, trading at 1,208 at the time of this writing. We are cancelling our entry order in gold. We will continue to observe the yellow metal for a future entry.

18/12/14 UPDATE: View our latest trading strategy in gold.

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