Sunday, February 12, 2012

Gold bull trap within Fibonacci cluster zone marks opportunity: charts view

Great KI$$ opportunities are appearing now, and one of the best is in $GOLD (or use GLD or other ETFs, or some may be trading GC_F futures). Gold is perched with a bull trap AND Fibonacci cluster zone which clearly demark a trading range it will move well away from for an extended swing-trade period of time - at least a couple of weeks and maybe more.

The P&F chart (above/right) shows the double-bottom breakdown with a preliminary target to $1660. But there's more. Break below (or above) this trading range I'm describing, and price will move much farther without looking back. Whether or not price dallies further within this range, it's a great move to trade with once it gets going.

The "bull trap" (means, bulls got trapped and must unwind, selling prices down lower) you can see on my weekly $GOLD chart below. It occurred after price hit up to $1923.70, then dropped on strong volume, then recovered to $1804.40. This got bulls going again, but then dropped again. Again on the latest rise, it got bulls going again. But bulls are trapped now that price dropped again under resistance - the sell trigger has occurred now. So long as price remains under $1800, it's vulnerable to dropping further with a price target below $1500 and likely around $1400. Price already triggered a trading "sell/short" by its recent drop - as you can even see on the P&F. And even the P&F chart will revise the price target objective lower once $1660 is violated.

Price rose on its most recent swing, up into a Fibonacci cluster called a "Triple Crown Zone" - the name given by Derrik S. Hobbs in his excellent 2003 book, "Fibonacci for the Active Trader" (publ., TradingMarkets(tm) Publishing Group). This trading pattern is one of his favorites, and it's become one of mine too, for its robustness. I don't want to give away his formulas, so I'll just say that in this particular Fibonacci cluster in gold right now, the swing trader positions short with a stop loss out at either $1771 in $GOLD or the equivalent $171 GLD (although one quick day's poke above this level can be permitted so long as it returns back under). Or, the bull-trap trader will be short with stop loss out at either $1766, $1771 or $1804. The bottom of the current zone is about $1724 in $GOLD, and $167 in GLD. Assuming gold continues to drop below this range, it's highly likely to drop much more.

The price target from the Triple Crown Zone short trade in this instance is initially to wait for $1458.07, then cover 50% of the position on a price that's above the prior day's high. Cover the remaining 50% either at break-even if price comes back up to the $1700's, or if price goes lower again to where your profits are significantly more.

We're aided in this situation because there's a price channel - marked in black on my weekly $GOLD chart, below - the midline of which $GOLD hasn't been able to move above. The lower boundary of that channel will droop and likely start providing support in the $1400's .... Or, much better, there's a Fibonacci retracement level at $1391 which I suspect price will test. $GOLD could touch that, or fall under it and then move back above. Assuming $GOLD does test $1391, then if it can make that support, it can move on to new highs such as $2500 and higher.

(click image to see it as a larger image)

BUT DON'T FORGET: if gold decides to go bullish instead, and pushes upward, above the zone I've described plus $1804 (about $176 in GLD), then switch KI$$ stances to be bullish in gold. Because that would signify it's regaining momentum sooner, and major buying will drive it to new highs. In my experience, whenever price busts above a zone like this, it becomes very bullish.

It's true that the technical indicators have regained some strength. But a drop especially under $1734 in $GOLD ($166.50 in GLD) will cause weakness to return. So the real key will be to look for positive divergence to appear as price tests the lower price objectives. That will also be a great clue on when to ride another wave or cycle to much higher levels.

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