Commodity Trade Mantra

Look at the Long-Term Gold Chart for the Trend in Gold Futures

Look at the Long-Term Gold Chart for the Trend in Gold Futures

Look at the Long-Term Gold Chart for the Trend in Gold Futures

As Janet Yellen and team prepares to sit down for its two-day Federal Reserve policy making meeting this week, it is an opportune time to review some key themes within technical analysis and charting, and to discern what the Fed meeting could offer in terms of trading opportunities.

Fed Meeting: Watch the Language

The financial markets place extremely low odds of a Fed rate hike at this week’s meeting. And, the ever-cautious Yellen Fed is unlikely to unnerve and shock markets with an unexpected rate hike. However, the “language” of the policy statement could change. Watch for a change in tenor toward a more “balanced” approach that could send signals that a December rate hike is in the works.

The Charts

Within technical analysis, there is a theory that traders should study the charts from a top-down perspective. Start with the long-term charts to identify the dominant or primary trend and drill down from there.

Robert Rhea, a legendary technical analyst working in the 1930’s used Dow Theory as a starting point and compared the three major trends (long-term, intermediate term and minor) as

Long-term trend = the tide
Intermediate term trend = a wave
Minor trend = a ripple

Rhea advised traders to trade in the direction of the tide, but to use the waves as opportunities.

Trading spots: The Federal Reserve may well offer precious metals traders and investors an opportunity to take advantage of the waves this week.

Let’s take a look at the monthly chart of nearby Comex gold futures. The left-hand side of the Figure 1 reveals the nearly 15-year sideways range for gold prices. From roughly 1990-2005, gold held within a large range between $425 and about $250 per ounce. The upside breakout from that long neutral trading range emerged in about 2005, which topped out above the $1,900 per ounce level in September 2011.

Look at the Long-Term Gold Chart for the Trend in Gold Futures

Fibonacci Retracement Analysis

From the 2011 high, a downside correction emerged in gold prices.  A Fibonacci retracement drawn off the breakout point in 2005 to the 2011 peak reveals that gold held above 61.8% retracement of the larger rally. According to traditional Fibonacci theory, a market can retrace up to 61.8% of a move without harming the original trend.

Translation: the 2011-2015 pullback did not harm primary uptrend in gold prices.

Circling back to Robert Rhea’s analogy that means the gold tide remains bullish. Pullbacks in the tide are waves that could be used as buying opportunities.

Mark Out Your Trading Plan Now

If the Yellen Fed changes the language of the policy statement and gold takes a short-term hit amid increased expectations for a December rate hike, could this offer a “wave” within the tide?

The Fed will release its policy statement at 2 pm Eastern on Wednesday. Use this time to plan your trades, so you are ready to pull the trigger if the wave crashes on the shore.




Courtesy: Kira Brecht

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