A “Three River Evening Star” identified in a daily candlestick chart of gold futures

On yesterday’s opening letter we spoke about the fact that even though gold traded to its highest value this year, it’s still closed lower on the day. That along with other technical factors suggested that we could be close to, or on the precipice of some type of correction in gold pricing. Considering that between the low achieved on April 1, and the high achieved yesterday as gold futures traded to $1788 resulted in a $216 range in just under two weeks, a correction could occur at any point, for any reason, most importantly when it’s least expected.

Viewing a daily candlestick chart of gold futures, we see the first candle of this pattern We witnessed on Monday as a large green candle. On Tuesday we were able to identify an evening star which unfolded when pricing went to its new yearly high, resulting in a “doji”, which is a candlestick that has an equal, or small price difference between the open and closing price of the session. The doji’ real body gapped above the closing price of the daily candlestick just prior this is why we labeled it in evening star. Today the market sold down strongly with gold trading to an intraday low of $1731.60 before recovering and closing at $1743, which is a net decline of almost $26 on the day creating a large red candle. This candle when combined with the former to candles creates a more complex pattern known as a “Three River Evening Star”.

Opposite to a “Three River MorningStar” this pattern should occur after a defined uptrend. The first candle of this three-candlestick pattern is composed of a large green line. This is followed by a small bodied candle which gaps above the close of the prior green candle. The pattern is completed with a red candlestick and contains a lower low and a lower high than the star just prior to this candle. The final red candle must contain a lower low and lower high than the star before it. Finally, it is advisable to take the signal following a confirming candle. In the current case of gold that would mean that tomorrow’s trading activity results in a red candle with a lower low than any of the prior three candles.

Our technical studies indicate that are two key price points that require our attention if gold pricing remains under pressure. They are both Fibonacci retracement based with the first level occurring at $1740 which is the 23% Fibonacci retracement of the last leg of this rally which took gold from $1577 to yesterday’s high of $1788. Below that is major support based upon the 38% Fibonacci retracement level which occurs at $1708.

Given that the market traded well below the first level at $1740, if this is an extremely shallow correction, we could see a base forming with support at this price point. However, it is more likely that will see gold prices close below $1740. If that does occur the next level, we would look at is $1708. Resistance remains at yesterday’s high which is $1788 per ounce.

Wishing you as always good trading,