Gold showing massive long-term divergence

Gold Full0216 Future since 2000The Gold market hasn’t been the most thankful in the past couple of months. Of course in our case this means that decent trend scenarios have been absent. Therefore the trendfollower sees himself confronted with many obstacles in price movement, that can ruin his previous profits. Risk Management plays a big role once again, how do you size up your position to catch a possible trend, but don’t waste any of your capital to keep performing well when markets are favorable?

Gold is currently trading in a market phase, in which a longer term direction can be determined, however, that doesn’t mean that prices move in such a thankful way as to yield profits, too. It is interesting to take a look at the long-term chart of Gold to find out what phase the market could be trading in right now, and what it has in store for the trend aficionado in 2016. The posted chart on the left sheds some light on the situation.

The posted timeframe you can see in this chart starts back in the year 2000 and continues through until today. Simply looking at the movement of price tells us that a huge uptrend took the price of Gold to levels never seen before. It took 10 years to reach a high of $1894, but the time necessary doesn’t matter – it’s fact, that the price of Gold almost hit $2000 in the year 2012, there is no reason it can’t top that in the future. Ever since the 2012 all-time high (ATH), price has retraced quite a bit, in fact about 45% of the previous gains were lost, so that especially in the last weeks Gold wasn’t able to trade higher than $1088. 45% may seem much, but in a typical market move, usual corrections can take up 61,8% of the previous trend (as per Fibonacci relations). Even if price was to continue down further, maybe to reach that Fibonacci level, or maybe go down even further, the current picture the market lets us see doesn’t support the opinion of a continuous downtrend. Zooming into the 45% correction on a weekly timeframe will help to clear up the medium-term outlook of this market.

Gold Full0216 Future weekly correctionThe chart shows the correction ever since the ATH in 2012 occurred. Prices went down nicely until mid 2013, providing nice profits for the trendfollower, even in this declining market. However, since then the price of Gold hasn’t been very good to a trendfollower trying to continue to profit from the downwards action. As said before, a price direction downwards can be recognised, but as this weekly chart clearly shows, the downside pressure is getting less and less. There is huge divergence turning up between price and momentum, not indicating a continuation of the downmove, which would be accompanied by increasing negative downside pressure (momentum). In the case of Gold price struggles to hold its downside direction, instead it keeps shooting back up into the moving averages. They represent a balance zone, where due to new incoming information, price finds a relatively stable level trading back and forth in a range. There is no news that sends the market up or down. It seems Gold really wants to come back into this balanced state after correcting almost 45% of the previous uptrend. Breakouts to the shortside keep failing or yield only very little profits in this scenario, which is an indication that sellers are leaving this market to either become buyers or stay on the sidelines.

It is the trendfollower’s job now to lie in wait, not pressure the market, but to observe and be awake to catch the markets signals in the opposite direction, too. As the short side starts to be difficult to establish a clear trend after a decent one had already presented itself, the probability goes up that the market will simply turn, provide a buy-fractal and then establish a new market phase in another direction. This takes a long time of course, most of the time a market will not turn overnight and run up/down the other way. It will be weeks, months, if not years, until a new major movement shows up. A lot of time has passed in Gold already since the first downtrend inside of this 45% correction was finished (mid 2013). It is more than two years later now, and price has still been “divergening” down in the direction of the trend. Unfortunately, in a manner that is not overly profitable for the trendfollower. If the price is “divergening”, it always shows the characteristics it does now: a recognised trend-direction without

a) sufficient pressure to

b) establish a clear, stable trend with

c) breakouts failing and prices

d) shooting back into the other direction and the market

e) desiring to trade within the balance zone.

Because of this it seems it is only a matter of time until this market shows buy-able breakouts to the upside, eventually ending this correction and maybe establishing new highs. Since we don’t care which way a market goes, as long as it goes, we would still be selling Gold as of now, with controlled risk and clever stops. Even though this seems to be the whipsaw-game currently, we can’t know for sure whether this market is acutally turning around .. therefore, we’ll continue to trade with the flow of the market, and when it bends, we will too.

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