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The Rally Continues, Gold Comes Back Into Focus

Numerous events had an effect on yesterday’s session, driving Wall Street and the major currency pairs higher. The Bank of Australia surprised the markets, increasing their central rate from 3% to 3.25%. Gold jumped above the $1000 mark and rumors that the Dollar might lose its status as a major currency in the oil trade, helped to push the indices higher.  The S&P500 closed the session with a gain of 1.37%, while the Nasdaq finished higher by 1.77%.

The trading day started on a positive note, as the RBA mentioned that they expect the Australian economy to return to a normal state during 2010. The bank took certain measures against future inflation, raising their central bank rate.  The RBA finished their speech by mentioning that with inflation now around stable levels and growth likely to be close to trend over the year ahead, they feel that it is now time to start to remove the stimulus provided by monetary policy from the markets.

Even though all the Australian Dollar crosses felt an impact from the bank’s decision the AUD/USD showed the most movement, continuing higher within its recent trend. After bouncing off trend line support last week, the AUD/USD climbed during yesterday’s session reaching the middle of its current channel.

Gold Climbs to new Levels.

The buzz of the day was Gold, reaching an intraday high of $1042.32. Already during mid-day, European hours, this hot commodity broke its prior minor range and headed higher. Within a matter of a couple of hours, Gold broke all resistance levels and climbed higher. Gold finished the day around its highs and held at $1040 during the overnight session.

From a technical point of view Gold has now breached its prior high formed in early 2008. When taking a glance at the weekly chart below one can see that even though this commodity is trading around high levels, indicators aren’t yet pointing yet to an overbought situation. According to some analysts including J.P Morgan, Gold could see higher levels in months to come due to the current situation. With the Fed expected to keep interest rates at low levels, investors are now heading out of the U.S Dollar, rushing to counterparts, which include Gold.

Market Data to Watch Out For

Looking forward, today’s session will be characterized by investors preparing for tomorrow’s interest rate decision. Even though the markets are expecting a ‘no change’ statement from both the banks, recent actions by the RBA have shocked traders, showing them that anything can happen.

GDP is scheduled to be released shortly in Europe and is expected to show a -0.1% figure. In addition, Australia will continue to shake the market, releasing their employment figures later on during the trading day.

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For those who still don’t know what this Credit Crisis is all about, here’s a really great visual treat from Jonathan Jarvis that simplifies the whole deal …

The Crisis of Credit Visualized

And then we have Steve Forbes from September last year with a reminder about the importance of a strong USD and what, in my opinion, is the only way to get the U.S. back to greatness; Value Adding and Innovation …

So now that you know the crux of the problem, this is where we are, one year later …

And finally, for your viewing pleasure, on the eve of two of the worst market crashes in history, let’s go back 80 years with two series of documentaries to see how the market destroyed so many lives then and how close the similarities are to our current time …

1929 – The Great Wall Street Crash & Great Depression: Part 1 of 6

1929 – The Great Wall Street Crash & Great Depression: Part 2 of 6

1929 – The Great Wall Street Crash & Great Depression: Part 3 of 6

1929 – The Great Wall Street Crash & Great Depression: Part 4 of 6

1929 – The Great Wall Street Crash & Great Depression: Part 5 of 6

1929 – The Great Wall Street Crash & Great Depression: Part 6 of 6

Here’s the other series on the same subject:

1929 Stock Market Crash Part 1 of 5

1929 Stock Market Crash Part 2 of 5

1929 Stock Market Crash Part 3 of 5

1929 Stock Market Crash Part 4 of 5

1929 Stock Market Crash Part 5 of 5

So that you don’t leave my blog uninspired and unmotivated, take this last video with you … if anyone knows the value of failure, I do and I can appreciate this message. Have a great day!!

[Conrad Alvin Lim]

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Price Patterns result when the market is not in agreement on the value of a stock. Essentially, they are the “visual remains” of a big battle between Bulls and Bears. In many ways, they are like weather patterns that you see on the nightly news. Often today’s weather can be forecast by looking at yesterday’s atmospheric data but occasionally (frequently?) the forecast is wrong. Similarly, chart patterns often but not always indicate future price movements.

At their core, most price patterns are combinations of several trendlines. The simplest pattern is the Rectangle Pattern.

In a rectangle pattern, price moves between two horizontal lines of support and resistance. In order to qualify as a rectangle pattern, both support and resistance lines must be touched at least twice. Rectangle patterns have a narrow or wide price range and last from days to months. The pattern ends once the line of support or resistance is broken.

A price break through resistance may be anticipated if volume expands when prices rise and contracts when prices fall within the rectangle pattern. An imminent price break above resistance may exist if prices don’t fall to the support line before rising again.

A price break through support may be anticipated if volume expands when prices fall and contracts when prices rise within the rectangle pattern. An imminent price break below support may exist if prices don’t rise to the resistance line before falling again.

As illustrated above, as soon as the pattern breaks down, the top (or bottom) of the rectangle changes into a support (or resistance) line for the stock.

Rectangle patterns clearly show the battle between bulls and bears with the bulls repeatedly buying when prices hit the support level and bears repeatedly selling when prices hit the resistance level. At some point, one of those groups will “win” and prices will breakout of the pattern. The longer prices have been in the pattern then the larger the “breakout move” will be and the more significant the new support/resistance line becomes.

Another common price pattern is the Triangle Pattern. The triangle pattern is very similar to the rectangle, except that the upper and/or lower trendlines that define the pattern are sloped instead of horizontal.

Go back to the rectangle diagram above and imagine that bearish sentiment about the stock was growing over time. What would that look like? Well, in that case, more and more sellers would not wait for prices to return to the level of the red resistance line before selling. Instead, they would sell sooner. That would cause the red resistance line to become a downward trendline forming a Descending Triangle Pattern.

Alternately, what if buyers started getting impatient and started buying before the stock got back to its green support line? Then a Rising Triangle Pattern would form.

And what if both the bulls became more bullish while at the same time, the bears became more bearish? Then both the red and green lines would be slanted and we’d have a Symmetric Triangle Pattern.

By the way, triangle patterns are also referred to as “coils.” Can you see why? As the upper and lower parts of the triangle get closer together, the battle between the bulls and the bears gets more intense and the suspense builds. Obviously, at some point, prices are going to move outside of the triangle’s boundaries – but will they move higher or lower? Psychological energy coils up like a spring inside of the triangle and the closer the lines get, the bigger the inevitable breakout will be.

As you probably guessed, the diagrams above are not realistic. Typically, triangle patterns have a breakout well before the apex of the triangle is reached. It is the direction of the breakout that is the key question when watching a triangle form. Will the bulls win? Will the bears win?

A couple of clues can be found in the price action that precedes the triangle. If the stock was in an uptrend prior to the triangle, there is a good chance it will break out of the triangle pattern on the upside and continue the uptrend. In addition, rising triangles tend to breakout to the upside while descending triangles often break lower. Symmetric triangles are usually not completely “even” – i.e., the support side may be stronger than the resistance side making the triangle “point up” or, if the support side is weaker, “point down.” In that case, the triangle often breaks in the direction it is “pointing.”

Next time, we’ll look at how to confirm these patterns with volume and examine some real-world examples.

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