Big Move Brewing For Gold
Tommy Humphreys | Aug 17, 2014 11:01PM ET
A series of lower highs/higher lows often leads to the formation of a symmetrical triangle (coil). Such is the case currently with Gold which has been coiling for weeks near an important price memory zone near $1300:
Since the April 2013 gold crash, the $1300-$1325 area has served as a powerful magnet for price. With the coil tightening recently, the probability of a decisive breakout from the range have increased significantly – from the stockcharts.com section on symmetrical triangles:
“The ideal breakout point occurs 1/2 to 3/4 of the way through the pattern’s development or time-span. The time-span of the pattern can be measured from the apex (convergence of upper and lower lines) back to the beginning of the lower trend line (base).
Edwards and Magee suggest that roughly 75% of symmetrical triangles are continuation patterns and the rest mark reversals. The reversal patterns can be especially difficult to analyze and often have false breakouts. Even so, we should not anticipate the direction of the breakout, but rather wait for it to happen. Further analysis should be applied to the breakout by looking for gaps, accelerated price movements, and volume for confirmation. Confirmation is especially important for upside breakouts.”
With the symmetrical triangle at roughly its 3/4 point, a resolution during the next week would be potentially quite powerful. While the Edwards and Magee statistic regarding symmetrical triangles as continuation patterns is certainly true most of the time, from my estimation the current setup in gold is a coin flip; the volume-by-price ‘air pocket’ between $1400 and $1500 offers a tantalizing upside target, seasonality is very bullish for the next 6 weeks, and sentiment remains quite downbeat, whereas the trend since late-2012 is clearly lower and price has been unable to sustain above $1320 for any significant period of time.
The CBOE Gold Volatitity Index (GVZ) also offers reason to believe a big move in gold could happen very soon:
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As evidenced by the above chart, the tightening range in the gold price has lulled options market participants into a relative sense of complacency. Historically when the GVZ has fallen to such low levels a large move in gold was not far away:
While the technicals paint a mixed picture in terms of price direction, there are mounting signs that a big move is brewing for gold….
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