first majestic silver

Gold and Technical Indicators

August 22, 2007

As everyone knew gold (spot) was going nowhere in the past week. During those days, the market has been developing a flag pattern in 4-hour charts. Technically, a flag is a consolidation pattern. What would happen at the end of a flag?

When a market is going sideways, it becomes very difficult to determine the current trend and direction of the market where it is heading. Worse thing is when there are too much news, fundamental data and reports are coming out every minute, everyone is information- overloaded.

In such situations, technical rules and technical indicators are useful to predict the potential breakouts and possible directions.

Although the indicators would not work all the time, most of them work from time to time. There are hundreds of technical indicators to identify the trend, volatility, cycle, etc, etc. Again, when we use too many indicators, it becomes quite difficult to reach to a conclusion.

To overcome this problem, we can selectively choose some technical indicators that work for you most of the time. Or you can develop own technical indicators.

I developed some technical indicators that can display the current trend and trend strength. When price is changing in a real-time trading environment, it is quite difficult see and decide the current trend clearly. So, I tried to display the trend with only two colours - red and blue. It becomes much easier to see the trend clearly when price is going up and down every second.

It is especially useful for anyone who has not got the knowledge in technical analysis that would normally take years to become proficient. I would illustrate the strength of technical analysis in trading decision making process. Although these indicators can be used in any timeframe, I will present on 4-hour charts only.

Due to recent deep falls, and choppy moves, most of the people will find it hard to trade in the recent days. If we look at Chart 1 of 22-Aug 08:09 BST (GMT+1), we can clearly see a flag pattern in 4-hour chart. Potentially, a breakout can be on either side of the flag.

As a technical rule, we would see a breakout after a consolidation pattern - a flag or triangle. The big question is "in which direction market would probably be breaking out?" By the help of indicators, I concluded that market could be breaking out to the upside. (Of course, uncertainly concluded in the beginning)

Although, we are quite scared to take long positions, market has been trading in a bullish mode as you can see blue "buy and sell" indicator bars for a few days in chart 1.

Chart 2 was made 22-Aug 23:14 BST (GMT+1). We can clearly see that the upper boundary of flag has been taken out and market clearly moved to the upside. If we take a look at the indicators at the bottom, all three types of indicators become in unison.

What Chart 2 telling us is the market has just started to break out, and potentially it would be moving higher as we see some signal strength blue bars.

Based on analysis from this chart, gold can reach to $667-670 soon unless it falls below 657 (that is what I identified to be a support level for 23-Aug).


I welcome any comments and questions about this analysis. Email: [email protected]

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