First off, I’d like to wish everyone a very happy & prosperous New Year! After taking quite a bit of time off vacationing with friends & family in cold but beautiful Winter Park, Colorado, I have now returned home & have begun to focus my efforts back onto the financial markets. Upon recently reviewing the charts from a relatively fresh perspective, my previous theme for the 2015 remains the same, that is my expectation that commodities are likely to outperform equities despite the fact that the primary trend in most (but not all) commodities remains bearish at this time while the primary trend in equities is still bullish.

Assuming that my prognostication proves to be correct and that aligns with your own analysis, how one chooses to position to take advantage of such trend reversals depends largely on one’s trading style and objectives. Shorter-term swing traders might opt to aggressively position long in precious metals and select commodities (and/or short select equities) following bullish (bearish) pattern breakouts, dips to key support (resistance) levels/moving averages, or following high probability bullish (bearish) candlestick reversal patterns, especially in conjunction with capitulatory volume patterns.

Until the intermediate & longer-term trends have clearly reversed, active/aggressive traders might consider booking full or partial profits (or set trailing stops) at the lower-end of the target range for those counter-trend trades. Once technical evidence builds that the primary trends have reversed, my preference will begin to shift to longer expected holding periods and larger profit targets (T3, T4, etc…) as those trades begin to morph from counter-trend trade to “inline” trend trades. Of course, every effort will continue to be made to post both long and short trade ideas that are inline with the current trends in various assets classes, as long as those trades offer attractive risk-to-reward profiles.

Longer-term swing traders, trend traders & investors might opt to wait for one or more longer-term trend indicators, such as certain moving average pairs/trios; primary trendline breaks; etc… to confirm an entry on a trade or investment before establishing a position with a primary focus on the daily & weekly time frames.

With that being said, here are a few different technical patterns on gold. The first chart below is the daily chart of $GOLD (spot gold). As pointed out a few weeks ago, $GOLD may be forming a Right Shoulder of an Inverse Head & Shoulders (IHS) Pattern (neckline has been slightly modified since that last update). Most importantly, $GOLD continues to hold the key 1180 support area that I have been focusing on for months now, albeit, by the slightest margin at this time. A break above the neckline AND the intersecting primary downtrend line would be quite bullish while a solid close below the 1180 area and especially the November lows would be bearish.

$GOLD daily Jan 2nd

$GOLD daily Jan 2nd

 

The next two charts below are a 4-year, 2-day period chart of GLD (gold ETF) along with a zoom-in of the daily chart of GLD showing two possible technical patterns: An Ascending Broadening Wedge and a Bear Flag. Bear Flag patterns are continuation patterns, meaning that prices typically continue in the direction of the trend leading up to the pattern. As the daily zoom-in chart illustrates, GLD has already broken down from the bear flag and successfully backtested it from below before continuing lower. Should that pattern play out, the measured target of the pattern would project down to around the 97 area in GLD.

Also shown below is a possible Ascending Broadening Wedge (ABW) Pattern. These patterns can appear during both uptrends as well as downtrends, as is the case here. Statistics on every technical pattern vary but one credible source reports that ABW patterns break out in the direction leading up to the pattern 76% of the time. Essentially we have three fairly well defined technical patterns on gold right now; the IHS (bullish), the Bear Flag (bearish) and the ABW (know to break either way although the odds favor a downside break due to the trend leading up to this pattern). Mixed signals for sure and of the three patterns, only the Bear Flag has yet to trigger a breakout. Therefore, more convention or risk-adverse traders & investors might opt to stand aside until we get a clear resolution of these patterns.

 

With that being said, there is an attractive R/R long-side entry on gold here around currently levels. A preferred trading strategy for ABW patterns is to position long on the third tag of the bottom of the wedge with a stop not far below. Today prices slightly overshot the bottom of the bottom of the wedge on the gap down in GLD with prices immediately reversing & moving up back inside the wedge (the third tag of the lower trendline). Therefore, an aggressive trader could establish a long position on GLD here with a stop just below this morning’s low of 112.32. With GLD trading at 113.73 as I type, that give the trade a downside risk of just over $1.40 with an upside potential of at least $4.25ish (my minimum target to the downtrend line around 118) or much higher, should prices break out above the downtrend as I continue to believe is the most likely scenario.