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Breaking Down the Gold Break Out

By Costas Bocelli September 6, 2012 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

Well it didn’t take very long to get our answer. 

And for my Profit Skimmer subscribers, it didn’t take very long to book a 90% return on a winning trade either.

If you recall, three weeks ago I wrote an article here titled Is Gold About to Break Out?.  We focused on a consolidation pattern in Gold prices and identified that a breakout was likely to materialize sometime soon based on the coiling technical picture.

Below is a quick snapshot I pulled from the article showing the coiled-up consolidation pattern.  The December Gold futures contract was $1606 per ounce at the time...

And while a breakout could have occurred in either direction, I made the bullish case that day.  My notion was based on the grounds that central banks -- particularly the Federal Reserve and the European Central Bank -- were gearing up to add further monetary stimulus into the system, which is broadly bullish for Gold.

Three weeks have now passed, and Gold prices have indeed broken out and surged nearly $100 an ounce.

Below is the updated daily chart on the December Gold futures contract.  Gold settled at $1694 yesterday after hitting $1701 and a 5-month high on Tuesday.

While the ECB and the Eurozone continue to flesh out the details on what their latest version of QE will ultimately look like, the Gold breakout in the meantime has actually been more fixated on the latest developments out of the Federal Reserve.

Let me explain...

On Wednesday, August 22, the Fed released their minutes from the last FOMC policy meeting on August 1.

The transcripts revealed that “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the recovery.”  The rhetoric clearly had shifted from the prior statement that insinuated only “a few members” might consider additional accommodation if conditions warranted.

Gold prices jumped $33 over the next 24 hours (green arrow on the chart).

And this past Friday, August 31, Fed Chairman Bernanke gave his widely anticipated keynote address at the Central Bankers Symposium in Jackson Hole, Wy.  I’ll spare you the details of his twenty-four page speech, but there were two significant takeaways.

First, he made it very clear that he’s “gravely” concerned with the weak job market and how the rate of labor improvement has been “painfully slow”.

And second, the closing lines of the speech pretty much telegraph that further stimulus is coming soon or is on a very short leash, otherwise known as the market’s implicit support or “The Bernanke Put”.

“...and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Gold prices popped sharply again, tacking on another $31 that day (blue arrow on the chart).

Nearly 70% of the $100 breakout move in Gold occurred on those two particular days.  And over the next week, the Gold market will be fixated on two more key events.

Tomorrow, the monthly jobs data will be released for August.  The unemployment rate stands at a 2012 high of 8.3% as measured by the household survey.  If that ticks up, Gold will likely continue charging higher, perhaps to $1800 an ounce (black dotted resistance line on the chart) as more speculation and momentum players pile on the QE bandwagon.

With the ISM manufacturing index having posted its third consecutive month of contraction and the worst reading in three years on Tuesday, there is mounting pressure on the Federal Reserve to further ease at their upcoming FOMC policy meeting next week (Sept 12-13).

A poor jobs report tomorrow will likely be the final straw to pulling the trigger for more Fed action.

However, Gold has indeed made a big run very quickly and, like all risk assets, they can pull back -- sometimes very sharply -- before making another push higher.

Gold will also react to the developments stemming from the Eurozone.  The month of September is chock full of political and headline risk, starting this morning with the ECB policy statement.

I’ll continue to follow my personal trading playbook by “peeling back the layers of the onion” -- or, taking a top down approach that combines what I call the "Big Three" of technical analysis and a fully hedged options strategy to seize the opportunities.

It's the very same that I teach in my Channel Trading Secrets course, and the same process that I use to find trading opportunities for my Profit Skimmer subscribers, like the 90% gainer in the SPDR Gold Shares ETF (Sym: GLD) playing the move I've been discussing here today.