Chart of the Day: Why Gold May Be Heading to $1,950

In my Week Ahead article yesterday, I broke down the tension between economic growth and inflation on the one hand and interest rates and recession on the other.

Yields are falling again after last week's rise, an interruption following a four-week decline. The dollar's journey was more volatile. All in all, it's lost 8.75% since its Sep peak, the highest in two decades. While we don't yet know what tomorrow's CPI print will show and how the Fed will respond to it on Wednesday, it appears that the market is getting ready for a recession. When investors focused on inflation, they weren't interested in the current payout, allowing yields to rise to their highest since 2008.

However, the falling yields, which occur when demand for their underlying bonds rises, demonstrate that the current payouts are suddenly acceptable. What would be the change of heart?

Two possible explanations:

1. The more the yield rises, the more attractive it becomes

2. The focus changes from concerns that rising prices will hurt economic growth to fears that the Fed's rapid tightening would cause a downturn.

Now, it's up to pundits to pontificate on newfound appreciation for bonds' current yields. Is the rising demand due to a flattening interest rate path of focus on preservation over returns facing a recession? The difference is academic.

On November 29, I predicted that gold would rise "to $1,800 on slowing rate bets." The yellow metal completed a falling flag continuation pattern, which helped it achieve a much larger reversal pattern.

As the trend reversed, the price completed a large H&S bottom since July. The price climbed on December 7 above the 200 DMA for the second time since December 1. Today's trading dipped but bounced off the 200 DMA, adding another support layer.

Some technicians might consider the current range a pennant, another continuation pattern like the flag. While its logistical location on the chart is perfect - on the very top of a big bottom and the support-resistance level since mid-May (red dashed line), I would have preferred to see a steeper incline before the pennant. So, while I can't say whether the technical expected chain reaction will follow through this range, I do consider an upside breakout another indication that the uptrend is intact and is, therefore, a good entry point for a long.

Note technical analysis is not magic. It's an attempt to gauge the market forces - supply and demand - and their trajectory. About 10% of H&S patterns fail to comply with the follow-through. Traders employ price and time filters to reduce a bull trap, which I'll detail below.

Trading Strategies

Conservative traders should wait for a 3% penetration, to $1,843, then for a return move that validates the neckline's support before committing to a long position.

Moderate traders would be content with a new high, as December 5's high nearly reached the min 2% filter. Then, they'd wait for a buying dip.

Aggressive traders could buy according to their strategy. Here is a generic example:

Trade Sample - Aggressive Long Following Dip

• Entry: $1,790
• Stop-Loss: $1,780
• Risk: $10
• Target: $1,820
• Reward: $30
• Risk-Reward Ratio: 1:3

Trade Sample - Aggressive Long Following Range Breakout

• Entry: $1,815 (After closing above $1,823 December 5 high)
• Stop-Loss: $1,810
• Risk: $5
• Target: $1,865
• Reward: $50
• Risk-Reward Ratio: 1:10

Disclosure: The author does not own any of the securities mentioned in this article.