A Week of Recovery, A Week of Price Consolidation

As far as gold pricing is concerned, it would be fair to say that during the last eight trading days, price movement in gold indicated a week of price consolidation followed by a reversal.

The recovery immediately followed the dramatic selloff that occurred a week ago Tuesday when gold prices plunged over $28 in a single trading day. This resulted in significant technical chart damage as pricing dropped below the 200-day moving average.

This selloff was followed by a total of seven consecutive trading days with very little price change between the open and closing prices.

There is a fundamental distinction between how a Western and Eastern market technician views price action over time. This significant difference is at the core of how market technicians differ in the way they interpret price charts.

Both technicians create a daily chart by using the same four components: the opening and closing prices, and the high and low of the cycle.

While the Western technician will create a simple bar chart from this data set, the Japanese counterpart will generate a candlestick.

The key difference is that a Japanese technician puts major importance on the relationship between where the market opens and then closes on a daily cycle. The Western technician puts his primary focus on a close to close connection from one day to the next.

The Eastern technical philosophy believes that the most important information is derived from the comparison of where a market opens and where a market close. The eastern technical trader sees each trading day as a battle; the candlestick will therefore represent the outcome of that battle. If the market closes above its open, it is drawn in green indicating that the bullish faction dominated market activity. If the market closes below its open, it is drawn in red indicating bearish factors dominated market activity

Another key distinction between these two technical approaches is that the Japanese technician views a daily candlestick that results in the same open and closing price with extreme reverence. This candlestick type is called a “doji.”

The doji represents a point in time when neither the bullish or bearish faction is able to have absolute control of price action and is one of the most essential candlestick types to the Japanese market technician.

The occurrence of six consecutive “doji” candles sends a powerful message to those who understand Japanese candlestick interpretation, in that they realize that it indicates either extreme consolidation or a point in time that a key reversal or pivot point will occur.

Those who incorporate Japanese candlestick methodology within their analysis were far ahead of the game this week, gaining insight above and beyond those who would do not include this trading style into their overall analysis.

Wishing you as always, good trading,