Gold futures are consolidating near its recent lows.

The metal sunk to a multi-month low on October 6 and has been locked in an exceptionally tight range since then. Technicians consider this a negative “bear flag” type of formation, but looking at other times gold fell to a 3-month low and then coiled into an extremely tight range, it actually rallied over the next month every time but once

Similar consolidations have actually led to higher prices over the next several weeks. 

Gold collapsed to a multi-month low on October 6 and hasn’t really gone anywhere since then. Its range over the past 8 days has sunk to below 0.75%, extremely tight when compared to similar time frames in its history.

Technicians would typically consider the current Gold futures price action bearish behavior, which basically could indicate that sellers are resting before continuing the recent trend.

gold futures chart

Let’s go back to 1975 and look for similar situations. We’ll look for any time that gold fell to a 3-month low at some point over the past 8 days and its maximum and minimum close were within 0.75% of each other during those past 8 days. There were 12 occurrences, and gold’s returns going forward are shown below.

The results were surprisingly bullish. This is supposed to be a bearish pattern, and in the very short-term it was. But even a week later, gold rallied twice as often as it declined. It kept getting better over the next few weeks, and by a month later, gold was higher 11 out of the 12 times, and with a 3-to-1 reward-to-risk ratio. What’s also notable is that almost every one of the dates was during the bear market in the 80s and 90s.

Based on this, the recent consolidation doesn’t look like a good reason in and of itself to be negative on gold over the next few weeks

gold futures chart
gold futures chart

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Best Wishes,

 

Joe Fallico

Principal Futures Broker
Series 3 & Series 30 Registered

Phone: 1-847-379-5000
Toll Free: 1-866-892-2030

Insignia Futures & Options, Inc.

 

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