Gold top? Focus on potential price targets | Filling the Gap in the CMT Association

In early 2024, gold reached the price target derived from the breakout of the large triangle that evolved from early 2022. Once the target area was reached, a classic buying peak halted the trend.

Subsequent trading ranges were characterized by distributions. If the breakout is down, the amount of distribution (cause) derived from the Point and Figure (P&F) numbers suggests that a 10-12% downside target is reasonable. But can this price target be reached?

This article performs technical evaluations on daily and weekly charts, provides evidence to suggest that the range is a likely distribution (Wyckoff), and shows how to use dot and figure charts to evaluate potential price targets.

weekly gold chart

Chart 1. Weekly chart of continuous gold contracts.

In November 2023, gold broke above the lateral resistance developed along the $2,079-$2,085 per ounce area.

• The lateral resistance and upward support created by the trend line (A) defined a large triangle.
• It seemed appropriate to determine a price increase target in anticipation of a breakout.
• I prefer to use a variety of techniques to create goals. I especially like Fibonacci extensions and retracements, point and figure chart predictions, and price channels.
• I look for a fusion of multiple techniques and combine them with traditional chart support and resistance to create goals.

Goals are useful in three ways:

• Make sure the reward exceeds the risk of stopping by at least 3:1.
• Monitor trend-ending actions against that target.
• Once that goal is achieved, we adjust existing transactions.

Importantly, the original breakout of the 2079-2085 triangle created a price target of 2540. The goal is derived as follows:

• 2079 (initial point of the triangle) – 1618 (bottom of the pattern) = 461 points.
• 461 points added to the top of the triangle (2079 + 461) = 2540 target.

I believe the triangle price targets are as follows: region Monitor resistance rather than individual points.

Additional targets can be derived using Fibonacci targets derived from the 1618 – 2085 – 1824 price sequence.

• 1.382% = 2461 & 1.618% = 2570.
• Immediately after the love triangle collapsed, joining The target numbers can be calculated as 2461, 2540, 2570.
• You can also channelize price action to derive potential targets.
• I prefer overbought and oversold defined by price channels rather than momentum. (e.g. stochastic, RSI or MACD).

In March the market broke out of the triangle and rose as high as 2454 in the following weeks.

• The combination of overbought in the channel, the 1.382% Fibonacci target (slightly below the 1.618% target) and the triangle target area clearly defined an area on the chart where supply is likely to develop.
• As the price approaches the objective confluence, it has already exceeded the two main channel highs, A1 (derived from trend line A) and B1 (derived from trend line B), creating overbought conditions in momentum measures such as RSI and stochasticity.
• When we see a resistance confluence of this nature, we begin to monitor trend-ending actions (e.g. buying peaks and secondary test patterns).
• A classic buying peak (BC) occurred despite very bullish news and strong bullish sentiment. Note that although it occurred on a wide range bar and set a significant new high, it closed near the low of the bar on much higher than normal volume.
• Buying peaks are usually resolved into trading ranges. Trading ranges can be distributional (marking long-term highs) or reaccumulating (pausing before going higher).
• Over the next three weeks, the market fell as low as 2285 before bouncing back in the second test (ST). The second test was completed with a wide price spread bar closing near the low. This is when I became particularly interested in patterns of price and volume and potential downside targets.
• The price-volume relationship should point in the direction of distribution or reaccumulation.

Typically, a range has only two results. That is, will the buying peak be short-lived and the market will re-accumulate for a period of time and then move higher, or will the buying peak provide a significant high, leading to a significant price reduction? Once the supply is fully distributed to the weaker hands.

At this point, we turn our attention to the daily perspective charts to closely monitor the price spread and volume relationship.

daily gold chart

Chart 2. Daily chart of the ongoing gold contract.

Without going into detail about Wyckoff’s price/volume analysis, I will make the case that the range is likely one of distribution. Supply appears just before a buying peak at 2449 (inside the oval), low volume and angle of attack during the rally to 2454 (second test), followed by higher volume and a close near the bottom of the price spread (last arrow). Rallies inside the range are being sold aggressively as strong hands are distributed to weaker hands. Additionally, most of the price action unfolded below the midpoint of the range.

Therefore, you should start planning your bearish breakout by evaluating the distribution. The first part of the plan is to arrive at an estimate of how much downside potential exists.

• One of Wyckoff’s main principles is the “law of cause and effect.” Cause refers to the amount of accumulation or distribution that occurs within a range. The effect is beyond that range.
• The accumulation or distribution within the range determines how far the range breakout will travel. That is, the time taken for integration is directly related to the subsequent distance traveled.
• Point and Figure (P&F) charts are used to determine the extent of the cause and create an initial price target for the out of range range.

Gold P&F One Point Box

Chart 3. Key points and pictorial chart of the gold continuation contract.

A trading range refers to an area on a chart where a large number of stocks change hands, often from strong hands to weak hands. This is why there is a consistent relationship between the length of a trading range and the size of the subsequent move. This is especially true in markets with very high liquidity and high trading volume.

There is endless debate about which points should be used to define a count. I like to keep it simple. I find a wall of range, count across both walls, and then project low. Others use smaller numbers derived from the two walls between the buying peak and the second test. In the end, I mainly use goals to help me define risk and reward, and to keep my attention on the chart as I reach my goal zone.

Assume current range not extended My assessment of the distribution is correct. These figures predict enough causes to suggest a decline between 2010 and 2030. As the range expands, the number increases and the price target also increases. From this perspective, I should be well able to form trades that exceed 3-1 (minimum) risk reward. I believe the risk-reward will exceed 10-1 once the trade is launched. This is because the stop vs. entry is likely to be less than 1%. If I’m wrong and the range is a reaccumulating range, the same method can be applied to a higher breakout.

Please note that this is not a trading recommendation. Entry will be determined by price action and trade implementation techniques that I will announce in the future.

Shared content and published charts are for informational and educational purposes only. CMT Association does not provide this information, and this information should not be understood or construed as financial advice or investment recommendations. The information provided is not a substitute for the advice of an investment professional. CMT Association will not be liable for any financial loss or damage that may occur to the audience.