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Chart Of The Day: Gold's Running Out Of Steam

Published 08/02/2022, 06:19 AM
Updated 07/09/2023, 06:31 AM
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  • Pelosi's Taiwan trip provokes China
  • Worries investors 
  • Treasuries and the dollar rally siphoning demand from gold 
  • Geopolitical tensions have risen on concerns about US House Speaker Nancy Pelosi's visit to Taiwan. 

    China responded to the news with a sharp warning. Beijing stated that its army would "never sit idly by" and "uphold China's sovereignty and territorial integrity."

    The heightened diplomatic crisis exacerbates pre-existing concerns over an economic slowdown, triggering market risk-off and sending US futures lower amid a European market decline following an Asian selloff.

    However, while increased demand pushed Treasury yields on the 10-year note to open lower, gold has failed to maintain its recent gains. At the same time, the dollar rallied for the first time in five sessions.

    Not only does a rising dollar siphon away investment from the competing haven, gold, but a strengthening dollar renders the dollar-denominated gold overpriced, weighing even more on its price.

    Gold Daily

    Gold realized its H&S bottom's implied target. Now that it's neared the top of its falling channel—a clear downtrend boundary defined by buyers and sellers—where sellers have been taking over control.

    Also, today's trading pattern is developing a possible (imperfect) shooting star. The candle's small body demonstrates apparent price equilibrium, while the long upper shadow reveals the path the bulls gave up to bears.

    The fact that this power struggle takes place at the top of the channel underscores the potential bullish fallout. The pattern is imperfect, as it also developed a small lower shadow. This price action may be noteworthy as it may mean that some buyers are profitable and will therefore not be shaken. Still, the disproportionately longer upper shadow increases the odds that many more bulls are already in losses, and a further decline thus heightens the chances for their selloff.

    The shooting star is not in itself a significant reversal signal. I am adding it to the weight of the evidence of a bottom whose implied target has been achieved, and the price reached the resistance of both its channel top and its preceding low, registered May 16. Finally, the candle's bearish bias is only valid on a closing basis, as it still might change today.

    However, even if the price's close is $1,792, it will have produced a high-wave candle. This pattern displays fear. All sound and fury, but signifying nothing. After running to and fro, the price remained unchanged. Again, that in itself is not necessarily bearish. It could just be a pause, but given that other factors are bearish, it increases the odds of a downward move.

    Trading Strategies

    Conservative traders should wait for resistance confirmation with a long red candle and then for a corrective rally to reduce exposure.

    Moderate traders would be content with evidence of supply.

    Aggressive traders should short after the price closes with a shooting star or wait for further resistance evidence if the price produced a high wave candle.

    Whatever the strategy, trading without a coherent plan, you are committed to gambling. Ideally, you'd have a plan incorporating your timing, budget, and temperament. If you don't have that, you can practice with my sample for educational purposes, not profit, or you'll end up with neither. 

    Trade Sample - Aggressive Short:

    • Entry: $1,792
    • Stop-Loss: $1,812
    • Risk: $20
    • Target: $1,692
    • Reward: $100
    • Risk-Reward Ratio: 1:5

    Author's Note: I am not in the business of fortune telling. If that's what you're looking for, I'm sorry. I am an analyst. That means I analyze an asset or market based on the evidence as I understand it. Note that all forms of analysis are based on the past, which is not guaranteed to be repeated in the future. Moreover, they are based on statistics, meaning that anything can happen on a trade-by-trade basis. The goal is to operate according to a plan that suits your needs, which you will trade consistently, allowing you to keep your account solvent until you catch up with statistics. Happy trading.

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