Last Friday I wrote about what I believed would be an impending breakout in the gold futures market. We knew the tight, range-bound price action of a couple of weeks ago couldn’t last forever and, sure enough, we opened up on Sunday night with some conviction to the upside. The Aug gold futures never looked back and went on to close on Monday at $1336/oz, up over $40/oz from where it closed on Friday. Although the market was able to breakthrough important resistance at $1300/oz and close comfortably above it, I’m still not ready to jump in with both feet with the gold bugs. Why you ask? Take a look at the daily chart of the Aug Gold futures below:
GCQ13 GOLD AUGUST 2013 (DAILY CHART)
As you can see, since the 50-day moving average (green line) started moving lower in late November of last year, it has proved to be formidable resistance in the gold market. Despite the aforementioned breakout to the upside earlier this week, the market has not been able to stay above the 50-day MA – closing within a few dollars of it all week. In addition to the 50-day coming into play, we’re also trading near an important 38.2% retracement level from the huge move lower that started in mid-April and bottomed out at the end of June.
Bottom line . . . be careful not to get too bullish after this week’s breakout. Some of the best trading advice that I’ve ever received was “Trade what you see, not what you think.” Although it’s easy to “think” that the market is going higher based on the price action of the past few weeks, we are currently trading at a very important level. I would concede to the gold bugs that $1400/oz is most likely going to be a reality IF the market can trade AND CLOSE above the highs of this week. However, before positioning myself long at this level, I want to “see” the market confirm that the trend has changed and that we may be in the midst of more than just a normal retracement after the big move down earlier this year. Because if the recent rally loses steam right here, we could very easily see a retest of the lows we experienced in late June.
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