The One Simple Moving Average Every Gold Trader Should Know
The bears have their claws out again. By last Friday’s close the gold price tumbled from $1,292/oz to $1,249/oz. But, I believe, the yellow metal’s abysmal performance could present the first decent buying opportunity in a long time…
How could a chartist buy gold in this market?
Below is an old chart gold analysts have mulled over for years. It shows just one technical indicator: The 144-day moving average.
Source: Saxo Capital Markets
Now why the dollar/gold price has decided to pick the 144-Day Simple Moving average as its key support and resistance level in the last two major movements is anyone’s guess.
But there’s no question it’s been remarkably effective in predicting the correct “accumulation” points for gold bugs in the last five years. Between January 2009 and 12 December 2011, this mysterious support line held without fail. It was tested and held a total of 26 times, showing only one false break, which lasted only three days at the very beginning of the movement in January 2009.
For almost three years traders have used this indicator with uninterrupted success.
The line was first breached on December 12th 2011. And the resulting 9% correction was a clear indication the trend had changed. The signal was a clear exit from the metal and traders could have closed positions safely with a strong reversal on the 25th of January 2012.
The bear market was then established and this same moving average began predicting each lower high in gold’s subsequent 34% slump. Ironically, it was Valentine’s Day in 2014 when traders of the 114 Simple Moving Average began to rekindle their love of gold. This was the first day in over a year the dollar gold price managed to trade consistently above the line.
Since that day, the price has skidded along the 114 SMA. And over the next three months, gold tested the line another 14 times without breaking.
This is a clear signal gold is once again in a consolidation phase. Interestingly, the previous consolidation lasted for most of 2012. And I wouldn’t be surprised if we were in for another year of choppy sideways trade in gold, which is bad news for gold zealots but wonderful for gold traders. Especially if we see gold beginning to build a base at this level. If the consolidation continues, I believe it’s possible that by 2015 we’ll resume our upward path and the gold bulls will be back in charge.
Gold Trade Details:
The break down last Wednesday represents a 3% correction below the line.
In the previous consolidation phase there were two significant contra movements: A 5.90% and a 9.66% deviation above the line. I would thus start accumulating gold on a 5% dip below the 144-SMA all the way down to 7.5%. Your stop loss should be set at 12% below the 144-SMA.
A quick “napkin” calculation based on where we’re trading this week gives you your first entry point at $1,215/oz and you can continue buying all the way down to the $1,180/oz double bottom.
Your conservative profit target would then be $1,330/oz for a 10% ungeared movement.
The Other Side: The “Experts” have a different opinion…
The analysts at SocGen seem to hold a far more bearish view.
The Wall Street Journal reports:
Societe Generale raised its near-term gold forecast, but said it remains very bearish over the medium to long term and continues to recommend selling gold rallies.
In a note dated Wednesday, it raised its 2014 average gold price forecast to $1,272 an ounce, attributing the increase to support from the Crimean crisis. Reports said the previous forecast was $1,180. Prices for the August gold futures contract GCQ4 -0.07% traded at $1,253.70 an ounce on Comex Thursday.
But Societe Generale said gold is likely to trade well below $1,200 next year, and to break below $1,000 in 2016 when the Federal Reserve is “likely to hike rates at a much faster pace than currently discounted by the market.”
Overall, the determination of the members of the Fed to “maintain the U.S. monetary policy towards tapering and gradual but protracted policy normalisation, including rising interest rates as the economic outlook continues to improve, underpin our bearish view about the gold price in the medium term,” they said.
As a result, it expects the gold price to average just $825 between 2017 and 2019.
– Excerpt Market Watch, “Societe Generale sees 2017-2019 gold price average of $825”, June 6th 2014
Now, Societe Generale might very well be correct, but if you are planning to sell rallies, rather than accumulating, the one thing I can say with certainty is, you should be watching the mysterious 144-Day Moving Average!