Warning Signals Sent By Gold Before Breakdown

By Corey Rosenbloom on July 30, 2009

I’ve heard on television all day about the “surprise” breakdown in gold prices over the last two days. Let’s take a look at one of the classic signals gold prices sent ahead of the down move this week, as well as learn a lesson on momentum.Let’s first start with the lessons from the past in this 60 minute of the mini-gold (@YG) continuous contract through July. Gold prices were moving down into the July 8th lows and then - along with the Stock Market - formed a tight consolidation instead of pushing lower as expected. The early signal that things were structurally changed came where I labeled the green arrow.

Price broke a confirmed descending trendline and broke sharply above the confluence of the 20 and 50 EMAs which served as a trend reversal (as price had formed a higher low and then took out two swing highs).From this point, a new uptrend was born, which was confirmed by new momentum highs.As price continued higher, we saw confirmation from spikes in the 3/10 Oscillator along with new price highs which hinted higher price highs were yet to come… and they did. We even had a nice bull flag entry to trade with low-risk to the upside that triggered entry on July 17th and 19th.

However, as price then pushed to new highs, we had three successive (relatively equal) “pushes” or new highs in price which formed on the classic divergence in the 3/10 (and other) momentum oscillators, which gave us the ominous “Three Push” reversal pattern that often leads to a price reversal… and it did. Price broke the support level and formed a new price and momentum low, which hinted that lower prices were yet to come, which was the case. Those skilled in discerning momentum principles, as well as trend/swing recognition, should not have been taken by surprise by this move down in gold.