Gold has finally come alive after sleepwalking through all of September.
Or is this just a dead cat bounce?
I am talking about the sudden 2.6% increase in the gold price two weeks ago. The rally saw the yellow metal closing at US$1,217.
It took a whole 24 hours for that rally to kick in, too.
Two weeks ago, the US markets took a severe hit, with the Dow Jones and S&P 500 both dropping 3.1% and 3.2% respectively. The NASDAQ was hit the hardest, closing down 4.1% that day.
Now, these aren’t the biggest falls for any of those indices. However, falls over 3% are generally treated as significant.
Something that should stir the gold bulls into life…
Asian market triggers gold price rally
A 3% fall – or in the Dow’s case an 830 point fall – should ignite the fear in the market.
Traditionally, you can expect a similar sort of reaction in the gold price.
Except, that didn’t happen. When the US markets closed that night, the gold price hardly moved. Up 0.67%. Roughly eight US bucks an ounce.
It’s a sort of nothing reaction. Which is odd.
Gold is considered the ‘fear trade’ and thrives in the sort of market action the US witnessed two weeks ago.
It took a full 24 hours for the fear trade to come alive.
When the Asian markets began trading a day later, only then did the fear trade begin.
This was the rally the gold bulls needed.
Why staying above US$1,210 is crucial
Being able to remain above US$1,220 is a very bullish signal for the metal.
But the question from here is, does the rally stick or is this a dead cat bounce?
A dead cat bounce is a phrase used by traders to point out a temporary ‘bounce’ in an asset price after a long sell-off. It’s a crude analogy, but the meaning is that even a dead cat will bounce if it falls fast and far enough.
In other words, it’s a way of suggesting a rally might not last and will fall again, and quickly.
Dead cat bounce trading patterns can be very hard to predict – and even harder to trade. However, there’s a couple of prices we can look for to tell us what may happen.
The most important part of a dead cat bounce is looking to see if the price stays above the ‘new high low’.
In this case, we need to see the price of gold get above US$1,210 over the week. If it falls below this level, then it means the gold price rally is still a few weeks off.
Now, a dead cat bounce is a possibility. But the reason why I’m telling you this today is because as a trader, it pays to be aware of what could happen.
Cheap gold no more
Bear market traps aside, what’s gold likely to do next?
In my view, I believe we have seen the bottom and we could see the gold price rally get ready to stretch its legs.
Since July, in our market video updates, I’ve been suggesting that the gold market would bottom around the US$1,180-1,190 mark.
Furthermore, I have consistently – or repeatedly, as my co-workers would phrase it – said that the gold price would begin to rally in September/October.
The reason for my two forecasts was simple. The price range of US$1,180-90 was part of a 10% price correction from the May high.
And the September meeting was when the Federal Reserve Bank would raise rates for the third time this year. A rate increase from the Fed is often a sign the gold price will move higher.
The days of the yellow metal being under twelve hundred bucks are over. These lows in the gold price we’ve been watching over the past few weeks will become traders’ folklore. An ‘I remember when’ tale of missed trading opportunities…
From here, to cement the gold price rally, we need to see the metal take a few stabs at the US$1,240-50 range over the next few weeks.
And if that happens, well hang onto your hats, because gold is getting ready to soar…
In fact, I have even suggested to my publisher that gold has the chance to go ‘parabolic’.
Like we saw at the end of 2008.
Perhaps even like the crazy gold price action in 1979.
A gold bull market moves in three distinct stages.
One of those is based around a weakening US dollar.
The second stage is where more and more investors begin moving into gold.
And that final stage is the stuff of legends. The days where gold moves up hundreds of dollars in value each month.
Simply put, I believe a new gold window has not only opened, but the yellow metal is getting ready to move upwards in a straight line once more.
The thing is, if you want to be part of that metaphoric rise, you need to know when the right time is AND the right way to play it.