Anatomy of a bull flag

A brief look at gold.

Macro picture: it bounced off a 50% retrace of its up move.  Are we bored yet by this phenomena?  Ready to place some bets?

gold macro 7-24-16

BTW, the reason that down trend line is not precise it because on the weekly chart, Think-or-Swim does not adjust for contract changes, and the line is drawn on an adjusted charts.  But you know, like horse shoes, close enough.

Some noteworthy comparisons of silver and gold: Silver way overshot Gold in the fall.  Silver fell from $49.82 to $14, losing about 70% of its value.  Gold only fell from $1943 to $1048, losing under 50% of its value.

Silver is leveraged relative to gold.  Silver is often thought to lead gold.  I think this is because of the industrial value of silver.  But in general, they are certainly correlated.

More interesting than the downside is the upside.  Gold rose from a 2000 low of $253 to $1923 in 2011, approximately 8x.  Silver rose from a 2002 low (ok, gold’s low came sooner) of $4, to $49.82, about 12x.

So, big picture, gold is a giant bull flag.  The way it bottomed was similar to silver, making a cup formation, then bursting upwards.  There is an obvious target above at about $1550.  How could we get an entry to gun for the target?  Hm, I wonder…

Gold July 9 16

A pull back to the breakout area from the lower consolidation area brings us back to the 50% and 61.8 % levels of the current up impulse.

One does wonder, however, about the sideways potential for silver and gold.  Both may base for a considerable amount of time.

Gold’s downward skewed consolidation (a bullish reversal pattern) between $1400 and $1048 lasted from 2013 until, well….it’s still in that range.  But it burst up from the tighter downward part in early 2016.  So it took 3 years.

There is a range phenomenon setting up here, and it could take a while to get out of it.  So while the $1174-1213 area might be buyable, one would have to be prepared for possibly a long wait to get results.

And certainly, there is no guarantee those levels will hold.  There are of course never guarantees in markets, only probabilities, and plans to play with the agility to compensate for uncertainty.

Another quite plausible scenario is that gold will start setting up camp here, establishing a range, and a range within a range.

Gold ranges 7-24-16

This may be gold basing, forming a bottom.  But 50% of the current up move, and 61.8% may not hold, and yet $1048 may still be the bottom.

How would we play this?  Probably those levels are playable on the first round.  However, there should be some tight scales, to lock in profit, then move stops up above entry levels.

If you get a wick below one of these ranges, then a re-entry, you could play the 80% rule, for a retrace of the range.

This has the potential to be a complex area.  That possible inverse head and shoulders could be seen as a range low too, giving us yet a third range.

Gold 3 ranges 7-24-16

This could end up looking like noise, or chaos.  But there is always signal in the noise.  Gold could even fall eventually all the way through the bottom of this range, test the nice neat round $1000 level, then reverse back up.

This could all play out over years, not weeks or months.  Gold never has tested that macro up trend line, the way that silver did.  Will it?  Not that trend lines are particularly important, except if they correspond to horizontal resistance/support.

The reason is that horizontal levels show us where the market perceived value in the actual auction, which a chart depicts as “consolidation.”  So let’s note the 2008-2010 squiggle gold never tested.

How all this plays out will probably be predicated on the dollar value, which will be related to the relative strength of various national economies, and central bank reactions, so called “currency wars.”

Let’s zoom way out to 2025, and suggest a very large time frame hypothesis, based on the chart of Gold.

First, I’ll add a Fibonacci fan.  I have found these to be uncannily accurate at predicting how price will break out of upward or downward tightening consolidations, but the new trend will fail, but the breakout level will hold, and you’ll get another slightly further breakout, etc.  So that in the bigger picture, you do finally get a breakout, but along the way you get a bunch of tiny failed breakouts.

Let’s also assume that gold does in fact want to test that up trend line.  But it does not want to fall much lower than $1000.

So here is my 10 year gold hypo:

10 yr gold hypo 7-24-16

 

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