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The Beachhead, A Scouting Party, and Gold Part II

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Since October 26th, when gold prices traded to $1262 for the second time to form a double bottom, gold prices have maintained and traded in a defined and narrow trading range. The first occurrence of this double bottom was the result of a strong correction which took gold pricing from $1362 to $1262 on October 5th.

After correcting $100 in price, gold attempted to recover, breaking above $1300 but faltering after reaching an intraday high at $1310. The selloff that followed this bounce resulted in the second occurrence of gold trading to $1262, thereby creating a double bottom.

From that point forward, gold began to trade sideways in a $20 trading range, defined by support at $1262 and resistance at $1282. Gold pricing would remain in this defined range for the better part of two weeks.

That was up until Monday of this week when, for the first time, gold prices breached resistance at $1282 on a closing basis. However, on Tuesday there was a lack of follow-through buying moving gold pricing back below resistance.

Which takes us to yesterday’s trading activity when, for the second time this week, gold closed above the current level of resistance residing at roughly $1282 per ounce.

In yesterday’s article, I spoke about a pattern coined by Steve Nison, called the “scouting party.” This pattern attempts to describe the inner workings of market participants when an attempt is made to move the current price of a given commodity above resistance or below support.

“At times there will be scouting parties sent by big traders, commercial accounts, or even market makers or locals to test the resolve of the opposing troops.”

In a bullish scouting party, a close above recent assistance completes the first part of this pattern. The second part of this pattern occurs if this bullish scouting party can set up camp in enemy territory (that is, close above resistance and maintain the new highs), then a beachhead is made.

This is precisely what occurred today when follow-through buying in gold, maintained its current pricing above the former resistance area of $1282. In essence, the fact that gold prices continued to maintain lows above the former resistance resulted in a beachhead being formed.

According to Nison’s pattern, new fresh bullish troops should now join the scouting party, and gold prices should move higher.

However, that action comes with a caveat; the Bulls will have control of the market, that is unless gold pricing moves back below the broken resistance, then the Bulls will have lost control.

If gold prices can remain above $1280 an ounce, we will get a “shift in polarity” in which the former level of resistance will now become support. Although it is still much too early to tell if recent price action will follow this pattern and gold prices will move significantly higher, for the first time since gold is traded sideways we have seen prices break out of that range.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer