To Profit From The Gold Market, Timing Is Everything
August 12, 2010 by Jim Prince
The gold market has gotten a lot of attention lately. Through the end of June, prices were soaring, and many people—professional traders and savvy amateurs alike—made nice profits trading gold on the commodity exchanges.
Since then, prices have backed off a bit. So now the big question traders are asking themselves is, “Should I look to get into the gold market now, or is it too late?”
When it comes to trading gold, or any other commodity, timing is everything. Technical traders time their trades using signals on charts of previous price activity in a market. They look for the appearance of standard formations that indicate the time is right for a market entry or exit. If the signal isn’t there they’ll sit on the sidelines until their charts give them the green light.
What are the signals in the gold market telling us? First, look at the weekly chart (a relatively long-term chart) of gold so you can see what all the excitement is about.
Weekly Gold through July 16, 2010 (view full-size image)
You can see how high prices are compared to where they’ve been. In fact, those highs at the end of June are the highest this commodity has ever been.
Now look at a recent daily gold chart to see what it tells us. It’s a chart of prices for December 2010 Gold (gold contracts that are due for delivery in December, 2010).
December 2010 Gold from Oct. 2009 through July 21, 2010 (view full-size image)
You can see the highs that occurred around a price of $1,270 per ounce, and that prices are now hovering around $1,180. So, what are traders to do now?
In my opinion, while the gold market may still be offering a tremendous opportunity in the long term, this is not the time to be getting in. This is the time to be waiting on the sidelines, and there are a number of reasons why I say this.
First, one of the primary principles of the trading methodology I follow is to trade with the trend. That means if the overall trend in a market shows that prices are rising, we want to buy the market—known as going long. Conversely, if the overall trend in a market is down we will sell the market—also known as going short.
We don’t want to go against a market. If the overall trend is up, but the market appears to be making a correction with declining prices, we don’t want to sell that market. We will wait to see if prices resume the rise and then we’ll buy. On the other hand, if the market clearly shows that the trend has reversed and that prices will continue to fall, we may then consider selling.
For all we can tell right now gold is only making a correction, which is to be expected in a market that has just made all-time highs. No market goes straight up or down. There are always advances, and then pullbacks, all along the way. As far as we can tell right now gold is in such a pullback and there is no indication at this point that the trend has reversed. But we don’t want to buy into the market while prices are declining because we have no idea how low they will go. As technical traders we would only consider buying when prices have clearly resumed the uptrend.
How low could prices go in a pullback? Look back on the December Gold chart and look at the horizontal line I drew. This is the 50 percent line. I determined where to draw this line by adding the high and low prices of the last major move in Gold and dividing the result by two.
There’s tremendous psychological power to the 50 percent line. Prices seem to be drawn to it like a magnet. Traders watch as prices approach this line. Often declining prices will bounce off this line and head back up. That may happen in gold. The 50 percent level is at $1,105. With current prices at around $1,180, that means gold may be being pulled all the way toward $1,105. That’s a pretty scary drop and there’s no use trying to catch a falling knife. I’d rather wait for prices to resume the rally before getting in.
Finally, there’s a fundamental reason why this may not be the best time to buy gold. As a general rule, gold prices tend to peak in late summer, and then decline through October when they usually bottom out. Then they tend to rise through the end of the year. If that pattern holds true this year, don’t be surprised if gold prices hold steady or decline until November. After that, if they resume their uptrend we may see new record highs.
So, how will we know when it’s time to consider entering the gold market? If you look at your gold chart it will tell you. What you want to look for is the leveling off of the downtrend followed by a resumption of the uptrend. This will likely occur when the traditional seasonal rally kicks in toward the end of the year. However, there are never any guarantees in trading. That’s why we have to look to our charts to confirm the wisdom of our trading decisions.
Successful traders only buy into a market that looks like it wants to move higher. If you’re interested in trading gold, become familiar with the chart patterns in this market and learn the signals that indicate the timing is right.