Gold is the darling of the financial markets and is the go to instrument in time of crisis. Of late it has been on a rollercoaster ride. After the U.S. election up until Christmas, we saw gold tumble from $1,300 to around $1,150. This all happened while the S&P 500 rallied 8%. We did have a rally in gold in mid-April because of soft economic data which enabled gold to creep back up towards $1,300. Was this a rally to mislead the retail investor to go long? There are investors saying that gold will rally back above $2,000 and we all know what happened when Goldman Sachs made this forecast back in 2011. Here is a little reminder…
There is a lot more weakness in gold than people think. As long as the stock market keeps rallying, gold will continue to weaken and when investors do not have fear of the markets they continue to reduce their holding in safe haven assets and put their money into equities. Take a look at the fear index, VIX, the chart below, which has hit the lowest level in 23 years. As the market appreciates in value, the VIX depreciates in value and on the chart below, you can see how low the VIX is trading.
Another reason why gold is not going to recover anytime soon is because of the Federal Reserve stance on interest rates. The Federal reserve has a hawkish stance on the U.S economy and has a more ambitious rate-tightening schedule. This will keep the U.S. Dollar strong and gold weak. When it comes to investing whether it’s gold or any other instrument, I don’t rely on the media to give me the facts, I rely on the price chart and more specifically, volume spread analysis.
“If You don’t listen to the news, you’re uninformed. If you do listen to the news you’re misinformed” – Mark Twain
If you had listened to the media back in 2011 in regards to where the gold price was headed, you would have made a donation back to the markets, specifically back to the ‘Smart Money’. On that day of the price prediction, you would have seen a large volume spike and the price of gold rally a little further. The price rise would have been created by the ‘Smart Money’ to entice the mum and dad investors to buy, while the ‘Smart Money’ were there selling into the up move. You have to understand that when the ‘Smart Money’ want to offload their holdings, they do this around news announcements so that they can hide their tracks.
Gold of late has shown weakness and I would like to show you how to predict when strength or weakness is entering the market. Take a look at the following Gold chart:
If you take a look at the area which shows weakness #1. We had an up bar on ultra-high volume, and this was a wide spread up bar. This tells us there may be a change in behaviour, there may be selling coming into the market. Around this point, you will likely to see positive news which will entice you to go long. What we saw is price starting to mushroom over and price did not advance much further. A move pass the high of the ultra-high volume bar wasn’t likely. Then at weakness #2 we saw another ultra-high volume bar, this time it was much greater in volume. It was the biggest volume on the chart. This point is quite significant as it confirms that there is still weakness in gold. What happened? Gold collapsed…
What you must understand also is that areas of ultra-high volume more often than not, get tested, and after the down move from weakness #2, we saw gold develop an accumulation channel and travel back to the area of the ultra-high volume bar where it tested and failed. Now you see gold break down below its distribution channel and my analysis tells me we may see gold test the lows of 1123. The chart above is the CFD contract of gold, XAUUSD.
What I tend to look for is a re-test of any sort of break of resistance or support. In this case, we have broken the support level of the accumulation channel, so I am looking for a re-test of that support level and a sign of weakness to drive the price of gold lower. Let’s take a look at Smart Center Pro and see what it tells us in regards to gold.
What Smart Center Pro is showing us is that gold is in price congestion. The monthly and weekly charts are trending upwards and the rest of the timeframes are mixed, so now this is when we wait for the roll over to the downside. The smaller timeframes will roll over first, obviously, and if it plays out the way I expect it to, expect weakness at the low of the accumulation channel.
If you have any questions at all in regards to what I have covered in this article or you would like to know more about Volume Spread Analysis, please email me email@example.com.
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Have a great day and I wish you constant profits
Professional Investor and VSA Expert
Have an excellent trading day
Professional Investor and VSA Expert
Author of Supercharge Your Trading & Investment Account Using Wyckoff / Volume Spread Analysis