The Scouting Party and Gold

For the second time this week, gold has traded and closed above a current level of resistance residing at roughly $1280 per ounce. This follows the last two weeks of market activity in which gold pricing has been stuck in a defined narrow range between $1262 (support) and $1280 (resistance).

In Steve Nison’s book, Japanese Candlestick Charting Techniques, he describes 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. He has labeled this market scenario a scouting party.

“At times there will be “scouting parties” (this is my term and not a candle expression) sent by big traders, commercial accounts, or even market makers or locals to test the resolve of the opposing troops. For instance, there might be move by the Bulls to try to propel prices over a resistance area. In such a battle, we have to monitor the determination of the bulls.

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. New, fresh bullish troops should join the scouting party. The market should move up. As long as the beachhead is maintained (that is, market holds above resistance), the Bulls will have control of the market. But once the market pushes back under the broken resistance, the Bulls have lost control.”

This market scenario (a scouting party) is precisely what is currently in play in regard to gold pricing. On Monday of this week, gold prices for the first time in two weeks traded, but more importantly, closed above the current resistance price point. In this case, the following day (yesterday) market price declined moving back below resistance.

Today, we once again have gold prices trading modestly higher, but more importantly, trading above resistance and closing above resistance. Over the next couple of days 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 today gold futures traded seven dollars higher to close at $1282.80, the key is that this price point is above the former level of resistance. In the case of a scouting party, steepness on would label today’s actions is the formation of a beachhead. As such we might be witnessing the point in which the bullish faction is attempting to regain control.

Wishing you as always, good trading,