- Gold completes a bullish break of a rising wedge pattern on the daily chart.
- RSI is overbought and showing signs of a possible consolidation or retracement.
- A very interesting story about a gold futures trader who did not close his position in time.
Rising Wedge Update
Last week we looked at the rising wedge in GC, stating that a break to the upside would be less likely than a retracement. Gold ended up breaking to the top side and is currently trading at $1,930 per ounce. Let’s take a look at some possibilities for price discovery in the near term and what we can do to better position ourselves in this powerful rally.
Relative Strength Index (RSI)
The RSI is overbought, currently hovering just over the 70 line. Remembering to think in probabilities, more often than not, when the RSI is overbought, especially when it’s been overbought before in the same trend, we’re more likely to see either a consolidation period or a pullback. However, we need to keep in mind the falling Dollar, so the pullback targets will need to be mild. If we do see the retracement, waiting on an entry signal using the hourly chart would be a good idea.
There are two levels I would be looking for if the pullback arrives. The first being $1,889 and the second being $1,834. Waiting on a candlestick reversal or a sign of weakening selling pressure on a smaller time frame would be the way to play this, in my opinion.
An Interesting Story About A Gold Futures Trader
Nick Leeson, a young and ambitious trader working for Barings Bank in Singapore was in charge of trading on the Singapore International Monetary Exchange (SIMEX) and quickly made a name for himself by making large profits for the bank.
However, things took a turn for the worse when Leeson began making unauthorized trades in gold futures. He would take large positions in gold, hoping to make a quick profit, but things didn’t go as planned.
Leeson forgot to close out his positions in gold futures, and when the contracts came due for delivery, he was on the hook for millions of dollars worth of physical gold.
Barings Bank did not have the resources to cover the delivery, and Leeson’s unauthorized trading caused the bank to go bankrupt. Leeson fled Singapore but was eventually caught and arrested in Germany.
The story of Nick Leeson serves as a cautionary tale of the dangers of not properly managing risk in the gold futures market.