On Monday, November 11th, we first spoke about two different technical indicators used to mathematically quantify market sentiment.
One study we spoke about which is used to identify current market sentiment was a simple 50 and 200-day moving average. Then we discussed a technical study referred to as a Fibonacci retracement and we used it to identify a potential bottom and price support in gold.
One critical benefit from the use of Fibonacci retracement theory is that this technique or study is one of the few leading technical indicators. Fibonacci retracement theory uses two price points to look forward and predict upcoming levels of support and resistance.
According to Investopedia, “A Fibonacci retracement is a term used in technical analysis that refers to areas of support or resistance. Fibonacci retracement levels use horizontal lines to indicate where possible support and resistance levels are. Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8% and 78.6%. While not officially a Fibonacci ratio, 50% is also used.”
On Monday November 11th, our research indicated that we could be looking at price support at $1446.10 which was approximately $11 below where gold was trading. At the time gold was trading at $1557, and had been in a defined downtrend since the first week of the September when prices reached approximately $1565, the highest value of the year. The data set we used for this retracement was from the low achieved at the end of 2015 (beginning of 2016), when after a multiyear correction gold hit a low of $1045, to the highest value gold had reached since that low which was $1565.
The first retracement level of interest was the 23.6 %, in this instance that retracement level occurred at $1446.10. On Tuesday November 12th, we identified the fact that on an intraday basis gold came within $0.10 of that retracement level, trading to a low of $1446.20, before recovering.
The fact that gold recovered after hitting that low, gave strength to the possibility that gold pricing had bottomed. Yesterday gold futures spiked higher and closed $10.70 higher to close at $1464.30. Then today gold closed up another $8.20 and as of 4:04 PM EST is trading at $1471.50.
While it is an accepted fact that fundamental events shaped recent price changes in gold, the use of Fibonacci retracement theory gave market technicians insight and defined a price point that pinpointed where the correction in gold would conclude.
Wishing you as always, good trading,