There was hardly enough time to grab hold and hang on to the top of the cliff before falling into the ravine. Gold prices had been rising persistently since September 2007. The commentators and advisers were nearly unanimous in their opinions that Gold was headed higher still, because the "fundamentals" required it. Interested investors were 95% (or more) bullish, which meant that almost everyone who favored Gold was already invested in Gold, leaving themselves vulnerable to a slashing decline if even one sell order finally tipped the balance. As is the case with many commentators, advisers, and economists, they were projecting past price events linearly into the future; but the markets don't work that way. The markets move in patterns; the patterns repeat; and they can be predicted, although not necessarily with respect to timing.
On March 5, 2008, a warning signal appeared, in the form of a Japanese Candlesticks "Last Bullish Engulfing" white bar on the Daily chart. In spite of its name, this pattern is bearish, in that it indicates a "last gasp" of a frenzied bull run and the possibility of a dramatic reversal. On March 13, prices gapped higher, thereby amending our view of the "Last Bullish Engulfing" pattern so that we now recognized it as a "Belt Hold," which had the capacity to lead prices higher still, into more rarefied air. On March 17, prices opened higher but closed down, for an overall "down day." On the next day, March 18, prices displayed a "Harami" pattern, which indicates indecision on the part of investors. We were alert to the possibility of a reversal, since our other Indicators were at or near the tops of their ranges, thereby giving off clear warning signals of a change of trend. Pressure was building.
On March 19, the floodgates opened. Prices gapped far down on opening and fell dramatically during the day. At the end, Gold had lost $59 per ounce in one day.
On March 20, prices again gapped down on opening, and closed with a loss of $25 per ounce on the day, which meant that the price of Gold had fallen 84 dollars per ounce - a decline of 19.5% in two days! One wonders how long it will take to "make it all back."
So much for Gold being a "hedge against inflation." Any investment which loses 19.5% of its value in two days is no hedge at all. What happened? Did Gold really lose that much value in two days? The short answer is No; Gold stayed stable. It was the Dollar which gained that much in value against Gold in two days.
Those who were able to read the Candlestick patterns and the warnings of other Indicators in time were able to protect themselves; and no doubt a pretty fair number of investors profited handsomely on the fast movement.
Perhaps there are some lessons that we could take from these events in Gold: One, trends do not persist forever; Two, it is a mistake to project past price action linearly into the future; Three, reversals of trend can be predicted by use of Japanese Candlesticks charting in combination with standard "Western" Indicators; Four, when "conventional wisdom" balloons to the point at which 95% of investors are of the same opinion, the "conventional wisdom" is very likely to be wrong; Five, try to catch a major trend reversal at the point of conception; Six, always use protective stops; Seven, don't bet the farm on any one single trade.
William Kurtz March 21, 2008 http://www.candlewave.com
Article Source: http://EzineArticles.com/?expert=William_Kurtz
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