When a market is working in volatility cycles as gold had been for the past month during its rally one could see the "inhale and exhale" visually with Bollinger bands.
The concept is simple enough to see. After a move, a market in rhythm with its volatility cycles will pause letting the market "reload" so to speak.
Spot gold lIve HERE
What makes a market ready to "exhale" is for us proprietary but easy to explain. There is a width between hi and low band that gives simultaneously the signal that the market has gone sideways long enough and is ready to move again. It does not predict direction, but the system also does us a service of giving natural stop outs once a direction is picked. Those stops (and possible reversals) come at opposite end of the Bollinger band.
Different time frames can be used to corroborate or contradict each other.
What we saw before the sell off was a band that gave the proper width for a good risk reward trade, but was not corroborated by other signals we use. The result was we missed the last leg of the rally for fear of a quick reversal.
The market proceeded to go into its final "kick down the stretch" before fully inhaling. The result was failure. This can be seen in how the nice smooth contraction/ expansion cycles on the 4 hour spot chart were disrupted.
Then we see what can be described as a changing of the guard in which the volatility cycle begins to reassert itself, but going in the other direction. The result is, what were pauses and bull flag pull backs going up will become pauses and bear flags going down if the Bollinger band cycles catch up to the market and then contract.
We actually hope for a quick painful selloff now before this volatility cycle can assert itself in negative fashion. If it does, we could see another $25 to $50 of downside. This, even if we first rally $10- $20 from here.
As bulls, we'd rather see the tumor cut out than months of chemotherapy. In doing so that will also help shed more quickly the hope filled longs placing their sell orders at $1363
Below $1325 basis Dec for any length of time (sideways is bearish again) and $1300-$1298 is hi probability.
We could rally up to $1350 and find nothing but selling. That's not to say it isn't a buy here, it implies that we'd rather sell rallies before buying dips as traders now. Regardless, the risk/ reward isn't there for us as the approach preferred is breakouts and reversals. We wouldn't say range trading is our forte.
One example that would be nice:
We marked August 31; this was a moment where the market rallied too steeply too soon, but did manage to recover while the bands were contracting. This is rare, but when it happens and coincides with other indicators, it's rally time .
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