Gold - A potential bearish scenario
"Bottoms in the investment world don´t end with four-year lows; they end with 10- or 15-year lows." - Jim Rogers
"The one who wants to protect his fortune doesn´t believe in anything but plans for everything." - Amschel Mayer Rothschild
Although its way too early for confirmation I thought it´s time to lay out a theoretical bearish scenario to make sure we are prepared for everything. In this case gold would move back towards $1,025 and make new lows..!!! But let me explain:
The 330$ rally since December 2015 has seen an important high at $1,262, an important low at $1,200 and another important high at $1,375. The weakness in gold since last week´s sell off is obvious. Should gold continue to slide lower it will very likely find a bottom somewhere around $1,210 - $1,220 followed by a sharp recovery towards $1,295 - $1,300. In that case we would have most of the ingredients for a bearish head and shoulder pattern if gold fails at the strong resistance around $1,300. If gold then comes all the way back down to the $1,200 neckline the pattern will get more and more obvious. A break through $1,200 finally will confirm the pattern and activate a price target at $1,025 based on the pattern height of $175.
What would increase the odds for this theoretical bearish scenario?
- Gold below $1,220 would shift the bigger picture (see Midas Touch Model)
- Gold continues the current sell off down to the neckline around $1,200
- Gold does not move back above $1,300 within the next 1-3 months
- Gold is breaking through the neckline at $1,200 (pattern confirmation)
- Gold is moving below $1,170 (= retracement larger than 61.8% of $330)
How can we make money in this scenario?
1. Buy gold around $1,200 - $1,220 and sell into the recovery around $1,295
2. Sell gold short around $1,295 with a stopp above $1,325 and hold this short-position until $1,025...
As already stated this is a theoretical scenario and should be understood as a backup plan.
"The one who wants to protect his fortune doesn´t believe in anything but plans for everything." - Amschel Mayer Rothschild
Although its way too early for confirmation I thought it´s time to lay out a theoretical bearish scenario to make sure we are prepared for everything. In this case gold would move back towards $1,025 and make new lows..!!! But let me explain:
The 330$ rally since December 2015 has seen an important high at $1,262, an important low at $1,200 and another important high at $1,375. The weakness in gold since last week´s sell off is obvious. Should gold continue to slide lower it will very likely find a bottom somewhere around $1,210 - $1,220 followed by a sharp recovery towards $1,295 - $1,300. In that case we would have most of the ingredients for a bearish head and shoulder pattern if gold fails at the strong resistance around $1,300. If gold then comes all the way back down to the $1,200 neckline the pattern will get more and more obvious. A break through $1,200 finally will confirm the pattern and activate a price target at $1,025 based on the pattern height of $175.
What would increase the odds for this theoretical bearish scenario?
- Gold below $1,220 would shift the bigger picture (see Midas Touch Model)
- Gold continues the current sell off down to the neckline around $1,200
- Gold does not move back above $1,300 within the next 1-3 months
- Gold is breaking through the neckline at $1,200 (pattern confirmation)
- Gold is moving below $1,170 (= retracement larger than 61.8% of $330)
How can we make money in this scenario?
1. Buy gold around $1,200 - $1,220 and sell into the recovery around $1,295
2. Sell gold short around $1,295 with a stopp above $1,325 and hold this short-position until $1,025...
As already stated this is a theoretical scenario and should be understood as a backup plan.
But one thing that doesn't fit is the volume of the potential right shoulder.. it should be lower than that of the head and of left shoulder. .
Instead we saw the highest volume in CME Gold history.....
A bounce towards $1,275 should start around $1,210 next week... but once we break $1,200 we need to return to this H&S scenario