Breakout or Fake Out?

Breakout or Fake Out?

August 30, 2017 Off By Chuck

After bottoming in December of last year gold went on to make a series of higher highs and higher lows through June, the sign of a possible new uptrend. Since June though, it has chopped sideways, stuck in a well-defined range, where $1210 acted as support while $1300 as resistance.  That all changed on Monday as gold broke out above both the 2017 range and November 2016 high. Yesterday, gold gapped up at the open but ended the day near the lows, forming a gravestone doji, and two legs of a 3-legged bearish shooting star reversal pattern.

There is no question how Wednesday closes will be critical for both gold bulls and bears alike. A close higher will likely invalidate the shooting star and put gold back on the path to retest 2016 highs near $1375. On the other hand, if gold closes lower and below the breakout level, there is nothing more bearish than a failed breakout which puts the nail in the “new uptrend” coffin and warns of a retest of this year’s lows.

Sometimes breakouts are event not market driven (could gold’s big move be caused by the fear trade brought on by North Korea’s missile launch or the fact on the same day a breakdown of the dollar occurred?). And when they are, they are susceptible to reversals as they turn in to “fake outs”. With that in mind investors need to be aware of this possibility and react to insure the protection of investment capital.