Trading channels are useful to traders and investors as they show us how price is likely to continue to develop. We are given a defined range of volatility in which price can rally and retreat while still moving in the direction of the trading channel. This presents traders in particular with multiple rebound and rally trading opportunities on both the long and the short side.
An additional advantage of the trading channel is that the price projection of a breakout continues to rise as price rises. Gold continues to develop using the upward sloping channel as the general definition of the secular trend. We can see price slide down Trend line C through both the top and bottom of trading channel B.
If we measure the distance between the top and the bottom of the channel and project this downwards we can draw a parallel up-sloping trend line to create a second trading channel. Trading channel A is currently where price resides and we see the same trending behavior as we did in trading channel B.
The development of this second trading channel though sloping upwards is a warning sign of a potential slowdown of trending activity. We can see additional signs of this warning as price continues to fail to push above the $1,800 an ounce level having tested this level a total of three times.
Price has once again rallied to test this level and retreated back towards the bottom of trading band A. Looking forward we can expect price to rally once more to test this level giving traders short term long side investment opportunities.
Traders are able to trade the channel trending behavior with confidence as they are generally low risk investments.
If price is unable to break through the $1,800 resistance level by the time the lower edge of the trading channel reaches the resistance line we will get confirmation that the upward trend has ended. In this situation the price will most likely enter a sideways consolidation period as markets determine the new trend direction. Price may fall back towards a new resistance level around $1,575 before rallying once more to retest the $1,800 resistance area.
A new uptrend can only be confirmed by a sustainable breakout above the $1,800 level. Once a breakout is confirmed it is likely traders will see a pullback and consolidation around the then $1,800 support line before continuing upwards.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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