Gold: Bulls Prepare For The Reversion Back Up To The Mean

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Includes: GLD, JNUG
by: Equity Management Academy
Summary

We are getting some indication that the price as we come into next week is in an area of demand.

According to the VC PMI, the gold market is very well supported with last week's low of $1293 activating a reversal back up.

We seem to be forming a wedge, a descending wedge or a bear flag, and a breakout from there would confirm a breakout to the upside.

Gold

Courtesy: TDAmeritrade

The price of gold of the June contract closed at $1293.50 on Friday. We are getting some indication that the price as we come into next week is in an area of demand. The B1 level is $1293. The B2 level is $1290. The VC PMI artificial intelligence is recommending that if you don't have a position, to look for a signal to be activated once the price touches $1293, which will give you a set up. A close above that level, using the next 15-minute bar, activates a buy signal. If the market closes below the B1 level, do not take the short signal, wait for the price to come down and test $1290. Upon testing $1290, if the market reverts back to close above $1290, it would activate a buy trigger point as we come into Monday.

According to the VC PMI, the gold market is very well supported by an area of demand, with last week's low of $1293 activating a reversal back up. The market came right up to test the resistance of the Fibonacci trend line. It then came back down from the trend line resistance into the area of demand identified by the VC PMI. The gold market is beginning to form a bullish pattern. We have a bit of a down-flag formation. All we need is another close above $1300 or $1306, which would begin to break out, particularly if we close above $1314, the previous high of last week, with a rally up to $1325 coming up, potentially to $1368. The $1325 level is a 78.6% retracement from the all-time high. We seem to be forming a wedge, a descending wedge or a bear flag, and a breakout from there would confirm a breakout to the upside.

The VC PMI Automated Algorithm

We use the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the precious metals markets and several indices. The primary driver of the VC PMI is the principle of reversion to the mean ("Mean Reversion Models of Financial Markets;" "The Power of Mean Reversion in Factor-Based Investing"), which is combined with a range of analytical tools, including fundamental logic, wave counts, Fibonacci ratios, Gann principles, supply and demand levels, pivot points, moving averages, and momentum indicators. The science of Vedic Mathematics is used to combine these elements into a comprehensive, accurate, and highly predictive trading system.

Mean-reversion trading seeks to capitalize on extreme changes in the price of a particular security or commodity, based on the assumption that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and buy low when an abnormal low occurs. By identifying the average price (the mean) or price equilibrium based on yesterday's supply and demand factors, we can extrapolate the extreme above this average price and the extreme below it. When prices trade at these extreme levels, it is between 90% (Sell 1 or Buy 1 level) and 95% (Sell 2 or Buy 2 level) probable that prices will revert back to the mean by the end of the trading session. I use this system to analyze the gold and silver markets.

Strengths And Weaknesses

The main strength of the VC PMI is the ability to identify a specific structure with price levels traders can execute with a high degree of accuracy. The program is flexible enough to adjust to market volatility and alerts you when such changes take place, so one can adjust strategies accordingly. Such changes include when the market breaks out of a consolidation phase or a trend accelerates. Such volatility usually happens when the market has produced a signal at the S2 or B2 level, and the market closes above or below these extreme levels.

The day trading program then confirms that a higher fractal in price has been identified, and the market will move significantly higher, although the same principle applies if the market falls significantly. By the price closing above the S2 level, it indicates that the buying demand is greater than the supply. This means that the market has found support for the next price fractal. Conversely, the price closing below the B2 level indicates that the selling pressure has met demand greater than supply at the extreme below the mean, and prices should revert back to the mean.

The basic concept of the VC PMI is that the program trades the extremes of supply and demand based on the average price daily, weekly, and monthly.

The strongest relationship we find in the algorithm is when the daily price is harmonically in alignment with the weekly and monthly indicators. We call this "harmonic timing." Such an indication produces the highest probability (90%) that the price will revert from these levels to its daily, weekly, or monthly average.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.