Fake Breakout: Returned to Ranging Till Next Economic Pointers

2022年10月14日

GOLD
While our gold bears much welcomed the latest CPI data release and those who started the short just above 1680 would have merrily captured about 35 pts in a flash, I can only hope that latecomers to the post-CPI bear party steered clear of what is now clearly recognisable as a 'fake breakout'.
The gruesome lesson on the importance of NEVER to trade near fake breakouts is, unfortunately, often out the window when emotions run high and inhibitions low. Time and again, it is a mistake even some seasoned traders make.

So How Do We Identify Fake Breakouts In Real Time?

Firstly, take your emotions out of the equation and examine the price action purely as an observer for a minute. This is so that your mind won't be taunted and consumed intermittently by the urge to trade the dip. You then need to watch for the development of responsive trading that brings the price back up mildly, and any further initiative trading (i.e. subsequent large displacement candles that pummel the price further down towards the lower limit of the falling channel. When a fresh breakout is followed by only responsive trading but no further initiative down moves using the 15 or 30 minute-charts, then you are most likely looking a fake breakout right in the eye. Best to avoid trading anywhere near it till price action brings gold back to a FVA where you can source high RRR trades by trading the rejections just outside the fair value box.

Back to the chart, we really do see a classic fake breakout last night following the CPI reading. What is also noteworthy is that, on the 4-hour chart analysis which I published on Wednesday, two support levels were identified using earlier price actions that unfolded along the main falling channel - one just above the control price of the falling channel and one just below it.

And the fake breakout quickly terminated right where it touched the H4 sub-control price support and commenced retracement just as quickly as the post-CPI dip. Gold is then returned to our post-NFP value area (identified also in the chart analysis published earlier this week).

Okay. So What Now?
Range-bound yet again, your safest strategy today might be scalping within the fair value box. For example, it may be beneficial (in terms of optimising your RRR) to enter a short just after a rejection is observed in the high 1670s, with SL set at 1685 and TP in the low 1660s.
Long or short, best to close your positions in the hours ahead of the US business inventory and retail sales updates tonight. These economic pointers shed further light on the market sentiment and can cement price directionality in EITHER direction.

So Where Is the Main Channel Headed?
Overall, the 4-hour large channel remains biased downward mainly thanks to the Fed's protracted hawkish stance. Bears however can never be too cautious in monitoring any early sign of a Fed pivot, as the slightest indication as such may rapidly return price action to the pre-war fair value area that lasted about 8 months (marked as FVA (1) in the chart below, and again confirmed by the return of some sense of normality in FVA (2) shortly after the episode of war spikes was over).


That's essentially why, over longer timeframes, bears entering any short position at this point would be doing so with relatively unappealing RRR and have very rather limited potential to profit from gold plunges (if the commodity plunges further at all again.)
Let's say gold does plunge heavily down to the lower limit of the falling channel, a superbly good trade then would be to long should price ever touch the lower limit of the falling channel (or better yet, break just below it and reach a downside rejection.)
However, we have 2 main reasons to believe that price will be rather unlikely to travel again into the 1600s - 1620s range:
1. Returning to the overview above of the falling channel, we observe a lot more price action in the upper half of the channel, which usually indicates that the downtrend is not particularly strong or can quickly come to a reversal in response to institutional push-up initiatives;
2. The most recent drop below the control price (in late September) came just after spending a whole week bouncing about within the 1660s-1680s range (which is right where we are now!), yet did not break through the channel into excess as it did in July. Instead, a quick rejection occurred right at the bottom limit of the channel (at 1614), followed by 2 initiative strides that returned price action rapidly to the upper half of the channel.

That's all from me today. Happy gold trading, everyone. And remember to always stay diligent, particularly in the presence of the allure of high emotions.