Evening Star In December Gold Awaits Bearish Confirmation

10/24/07 09:38:18 AM

by David Penn

Negative divergences in the MACD histogram and stochastic support potential for correction in the yellow metal.

Security: GCZ7
Position: N/A

My last discussion about gold in Traders.com suggested that the market was shaping up technically to establish a bottom ("A 2B Bottom In December Gold?", September 5, 2007). At the time, December gold was trading at approximately 676.20 and had just rallied from a test of its June lows.

With the benefit of a bullish technical portrait and favorable seasonal tendencies (both discussed in that article), gold advanced strongly out of August, through September, and into October.

FIGURE 1: GOLD, DECEMBER FUTURES, DAILY. The lack of downside follow-through prevented a short sale in December gold in earliest October following a previous evening star pattern.

Graphic provided by: eSignal.

The first sign of trouble appeared in late September as a breakout from a short-term consolidation led to an evening star pattern between the final trading days of September and the first trading days of October (Figure 1). This evening star pattern, however, did not yield any significant follow-through to the downside on a closing basis. This negated much of the bearishness of the symbol — and all but eliminated its validity as a sell signal. Sure enough, within seven days after the evening star pattern appeared, December gold was making new contract highs.

GOLD, DECEMBER FUTURES, DAILY. Negative divergences in both the stochastic and the MACD histogram helped confirm the bearish potential of the evening star pattern in the second half of October.

Graphic provided by: eSignal.

Key technical indicators — in this case, both the stochastic and the MACD histogram — confirmed both the older evening star and the more recent one that has appeared in late October (Figure 2). What prevented — or should have prevented — traders from making bets against the gold market in the case of the former evening star was the lack of a confirming close below the low of the pattern.

The fact that the current divergences with the late October evening star are all the more pronounced than the previous ones does make it somewhat more likely that the late October evening star will result in a more significant correction. However, until the market for December gold makes a confirming close below the low of the evening star pattern (a low at approximately 749), gold bears would probably do well to wait before trying to take head on what has been a strong rally from the August lows.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Evening Star In December Gold Awaits Bearish Confirmation

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