A Note Re: Gold’s Potential Descending Wedge Bottom

One of the things that make me think gold is putting in a descending wedge bottom here is the ratio of the parts of the move up from the April 15 low.  The first part of the move went from 1338 to 1405. That’s 67 points (on the August gold futures contract).

The price retraced a bit, then the second part of the move went from 1340 to 1488 (same contract). That’s 148 points.

148 / 67 = 2.21.

If the ratio is much over 1.6, the wave is highly likely to be a leg of a triangle or wedge. Because the price has dropped to a new low, it would have to be a descending wedge.

Wedges are a must-play for me. Very high returns.

This will be a playable bottom (assuming the price breaks out the top of the wedge), but no way to tell if this is the final bottom for gold.

Price Action That Would Change the Odds at the 200 dma & Trend Line

A Triangle at a Potential Neckline Would Change the Odds at the 200 dma

A Triangle at a Potential Neckline Would Change the Odds at the 200 dma

You need triangles and/or wedges to reverse a significant move because these formations are the footprint of big money changing sides, and it takes big money changing sides to reverse a significant move.

Assuming the price on the E-mini/SPX makes it back to the potential neckline after having broken out of the bottom of the short-term ascending wedge, a triangle moving sideways there would improve the odds of the price breaking through the 200 dma and trend line from the October 2011 low.

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Potential Gold Descending Wedge

Possible Gold Descending Wedge Forming

Possible Gold Descending Wedge Forming

There’s a potential descending wedge forming on gold, but you can’t bet it unless it completes. That would mean a rally to the silver line, then a move down to a lower low that stops either inside the formation or a little way through the bottom of the formation.

You’d bet an upward breakout from a complete formation and the target isn’t very high—roughly 1420 on the August futures contract (the first touch on the top of the wedge). Often prices overshoot the target after descending wedges, so the price might go as high as 1500 if the formation completes.

But there are also non-trivial odds that gold goes into a small rally or sideways move and then straight into a drop of another 425-450 points. That’s because the two moves down from the last touch on the top of the blue channel are roughly equal in length. In that situation you often get a third drop to a target calculated by subtracting the combined length of the first two waves from the low of the second wave. If that’s going to happen we should get a set-up to short it.

A Question on the Math

A question came up from a friend regarding the math on protecting profits (post directly below). Was the math on my initial edge wrong, considering the proximity of the 200 dma? No, I don't think so, because the character of the move down might have been different—it might have been the kind of move that could have crashed right through the 200 dma. But that's not what the wave turned out like. I'll try hard to get comments enabled over the weekend.