William Kurtz

Candlesticks Fool Gold Bulls Again

The Candlestick pattern left behind by Gold on Thursday, September 18, 2008 could have fooled investors into believing that a trip back toward $2,000 Gold was in the making.  The Candle patterns told a different story: that, rather than advancing further, prices would likely fall the next day, which they did.

Gold sallied forth to advance $100 per ounce within the space of two days this week.  That left the price bar of Gold, as displayed on a chart, sitting up there all by its lonesome at a closing price of $897 per ounce on Thursday, September 18.  We have not seen Gold prices at that level in more than a month.  It was so very, very tempting to conclude that Gold was on a new tear, back toward the storied Castle-in-the-Sky $2,000 per ounce.

However, a closer look at the shape and other details of the price bar pattern yesterday tell not of a new bull market in Gold.  Rather, they tell a tale of Warning to those who know how to read Japanese Candlestick patterns.

Specifically, yesterday’s price bar on the Daily chart was a Spinning Top, with long shadows (“tails,” or “wicks”) both above and below the “body,” which is the area of the Candle between the opening price and the closing price.  This reveals Indecision in the marketplace.  There had been great volatility in the Gold market that day, with prices ranging far in one direction and then far in the other, but at the end of the trading day the closing price was not very far away from the opening price.

A closer look at the action, as revealed by the ten-minute chart, revealed a modified, or “corrupted” if you will, Evening Star pattern in which the Star was a Shooting Star.  There was no corruption in the Shooting Star itself; it was a beautiful example of the type.  Furthermore, the bar which followed the Shooting Star completely engulfed it, and the fourth bar of the series was a “Hanging Man.”  All of these together – the Shooting Star, the Engulfing bar, and the Hanging Man – have bearish implications.  And finally, the four bars together we take to be bearish, even though not a classic Evening Star pattern.  All of it foretold the likelihood that Gold prices would not continue their upward path; rather, that prices would fall.

That is exactly what happened today, September 19: Prices fell more than $32 per ounce.  No doubt many investors bought Gold yesterday on the strength of their perception of the advance and, especially, of the gap-higher close on Thursday.  It certainly looked as though Gold was setting up for another voyage to the clouds.

And yet, those who understand the Candlesticks not only did not buy near the market close yesterday, or today (Friday); they voted in the opposite direction with their money, went Short or bought Puts, and were rewarded with a $32 gain.

There is no substitute for learning how the Candles operate.  Every investor and trader owes it to himself or herself to at least learn the basics, not only to identify good trade setups but also to keep himself or herself out of bad trades for failure to understand the signals.

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