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Gold Will Setup For Another Buying Opportunity, But Not Yet

September 8, 2019 By Cory Mitchell

Gold is in an uptrend after a multi-year bottoming pattern. Don’t worry about chasing the price as it moves higher. The price is likely to experience a significant pullback which will provide another buying opportunity. Here’s how to capitalize.

When an asset is on the move it is tempting to jump in because our fear of missing out kicks in. Jumping in is usually an emotional guess or action, which doesn’t often end well.

Wayne Gretzky, the NHL’s all-time goal leader, once said “Skate to where the puck is going, not where it has been.” This holds true in trading as well, on multiple levels. As it refers to chasing prices, think about how an asset typically moves and then consider where the price could go next. Don’t jump in just because something is going up right now. Think about whether it is likely to continue to rise, or whether a pullback is likely. Think about where the best place to trade is, based on risk/reward, for example.

There are times to buy and times to wait. Our strategies help us determine which of these actions we should take (waiting is an action because it is a conscious choice). Our strategies help us frame where the price is likely going. This doesn’t mean we are right all the time or can call exactly where the price is going next…and we don’t need to. All we need to know is how trends typically work. Once we know that then we can wait for an opportune time to enter a trend.

Gold’s Trending Opportunity

Take gold for example. The weekly chart shows a long bottoming process. Between 2016 and 2018 the price made higher lows but couldn’t break out to the upside. In 2019 it did.

In my trading, I usually wait for a consolidation, and then an upside breakout from that consolidation (for long positions).

  1. That consolidation can occur right near a major resistance level. This is often the kick-off point for a new trend.
  2. Or it can occur during a pullback while the overall uptrend is still intact.

An example of 1 occurred in the SPDR Gold Trust (GLD) in July. The breakout from that consolidation was an opportunity to buy. Right now is not. Waiting for a pullback is a prudent play.

gold weekly analysis for next buying opportunity

Trends are created by higher swing highs and higher swing lows. Therefore, the price is currently creating a swing high, and will eventually drop and form another swing low before moving higher to create another swing high (assuming the uptrend continues).

Instead of chasing the price higher into a swing high, let it pull back and catch it near the swing low. Let the price fall and then consolidate. Only buy once the price has pulled back, consolidated, and then broke out of the consolidation to the upside. This means we aren’t chasing the price, but envisioning what the price is likely to do, and then having a plan for if it does it. 

We don’t need to predict exactly where the price will go. I have no idea if GLD will fall to $137 and then go higher, or fall to $133 or $129, for example, and then head higher. The pullback and consolidation will let me know where and when to buy: when the price breaks above the consolidation during a pullback.

The consolidation needs to occur prior to the price reaching a new swing low. If the price drops to a new swing low, then the uptrend is in question and there is no trend trade.

The last swing low on GLD was $119.54 in late April. So if the price falls all the way down there, I have no interest in buying. That said, we also know there is a strong former resistance area between $131 and $128. Prices often retrace to test old resistance areas, so I would want to see the price stabilize above $128.

Therefore, I am waiting for the price to pullback and consolidate anywhere between about $140 and $128. I don’t care where, I just need to see the price drop and then consolidate.

To fine-tune my entries, I look at the velocity of price movements to determine which consolidations to trade, since not every consolidation is worth trading.

If the price plummets lower and then consolidates, I have no interest in buying.

If the price moves lower in a choppy fashion, on low volume, showing sellers aren’t very aggressive, and then the price consolidates, I am more likely to buy on an upside breakout of that consolidation. For a deeper discussion on velocity, see Improve Your Price Action Trading with Velocity and Magnitude.

Final Word on Trading Gold Now and in the Next Several Months

Buying gold is of no interest to me right now. That doesn’t mean it can’t go higher from here, it just means it doesn’t fit my strategies.

Gold does get interesting to me if it starts to pull back and then consolidates below $140 and above about $128. I would only buy once the price moves above the consolidation.

I watch how quickly the price moves into the consolidation to determine if I want to trade it. A steep drop and I usually pass and wait for the next consolidation (and then watch the price heading into that consolidation).

This my game plan. It doesn’t mean the price will form the pullback and consolidation I want. Yet this type of planning helps prepare me for deploying my strategies if the price unfolds in this manner…which it often does. If the price doesn’t move in the way I expect, I don’t fret about it. There are plenty of other stocks and assets that are producing patterns that align with this type of game plan all the time.

By Cory Mitchell, CMT

For reference, here are the consolidations that occurred during pullbacks or near resistance during the last major bull market heading into the 2011 peak. You would have fared very well.

buying on consolidation breakouts in gold 2006 to 2011