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Gold: The Line of Least Resistance

Commodities / Gold & Silver 2009 Jul 02, 2009 - 02:51 AM GMT

By: Frederic_Simons

Commodities

Best Financial Markets Analysis ArticleGold ! The ancient metal of kings. A lot has been written and discussed lately about gold's ability and inability to go parabolic and move past the 1000 USD barrier. There are fundamentally based discussions about effects of quantitative easing, the monetary basis, M3, the prospect of hyper-inflation vs. deflation, derivatives, artificial gold price suppression, Commitment of Traders reports. 


While all of these topics are quite interesting to read about, but if you are trading gold in the futures market or by playing the GLD ETF, your trading decisions might not actually benefit from any "knowledge" (or rather confusion) acquired by reading any of the subjects mentioned above. 

It is always good to know that - as with gold - fundamentals are more likely to support rising prices than falling prices in the long term, ie using a time horizon of 5-10 years. However if you are trading gold's up- and downswings, these are not considerations that should influence your trading decisions. Even over the intermediate term (months), price action may well be "out of tune" with fundamentals. A margin call because of a losing gold futures trade would certainly not be more comforting if the fundamental idea behind the trade "feels" right or sensible.

Therefore, I prefer an approach that bases short- and intermediate term trade decisions on the actual behaviour of the gold price, not on fundamental aspects. For this purpose, I developed a proprietary indicator that finds out the line of least resistance both to the downside and to the upside, and prints them on the chart as a green line (buy line) and a red line (sell line). You can see on the following charts that if the price trades for 2 consecutive bars above the green line, rising prices are to be expected. Once the price trades for 2 bars below the red line, you should prepare for falling prices:

So on the bigger timeframe (180min chart), gold is currently rangebound between the lines of least resistance: 947.1 and 925.5 USD, as evidenced by the one-bar spike to the downside and yesterday also to the upside. Both lacked the required follow-through to break out of the established range.

So as a trader, possible plays would be to play the break-out of this range, be it to the upside or the downside. Just let the market decide if we see Gold at 1000 USD next or at 900, and follow the line of least resistance.

If you have any questions, please do not hesitate to contact us by writing an email to

By Frederic Simons

http://www.crossroadsfx.hostoi.com

© 2009 Copyright Frederic Simons - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed


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