Earlier today, gold futures hit a seven-year peak of $1734.35. They've retreated for now, but we believe the contract's bullish run is by no means over. It may yet take on the August 2011 all-time high of $1913.50.
Indeed, even after slipping from its session highs, the yellow metal is still up for the fourth day in a row. And this comes after yesterday saw the best U.S. equity rally since late March, with indices reaching near-4-week highs.
This also occurs despite China’s report today of its first day since January with zero coronavirus-related deaths and an apparent flattening of the fatalities curve across global COVID-19 hot spots. Yet demand for the original safe haven asset remains strong.
Technical analysis supports this theory, with clear indications the precious metal is likely to go a lot higher, possibly even challenging its record.
The contract has completed a H&S continuation pattern. It looks like a bottom H&S, but it follows an uptrend. It also contains the same dynamics: a temporary struggle between supply and demand, with demand absorbing all available supply, then increasing bids to meet new, willing sellers.
Investors must consider fake breakouts, or in this case, a bull trap. Traders employ a device called a filter, in which they wait for a price penetration and/or time to go by, which proves the move is stable, before they risk a position. So far, we have a 2.39% penetration and if the price closes above the $1,700 neckline we’d have a 1-day filter.
Trading Strategies
Conservative traders would wait for a minimum 3% price penetration and a 3-day time filter. That means if the price approaches $1,750 and remains above the $1,700 neckline, they might be willing to go in. They are also likely to wait for a return move that demonstrates accumulation above the uptrend line.
Moderate traders may already be satisfied by the price penetration but may wait for a Thursday close to satisfy the time filter. They, too may wait for a return move, but for a better entry, not necessarily for proof of trend.
Aggressive traders may jump in for an early take after the price closes today above $1,700.
Trade Sample
- Entry: $1,700
- Stop-Loss: $1,690
- Risk: $10
- Target: $1,730
- Reward: $30
- Risk:Reward Ratio: 1:3