Chart Advisor: The Golden Bear Trap – Markets surge for second day in a row as risk appetite returns.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Tuesday, 4th October, 2022

1/ The Golden Bear Trap

2/ Confirmation in 63-Day Highs

3/ Energy Hasn’t Broken Out Yet

4/ Volatility Cools in Crypto

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1/ The Golden Bear Trap

Precious metals have come roaring back in recent days. The price of gold is up 6% over the past five sessions, marking its best five-day gain in more than two years. We’re seeing these kinds of short-term momentum thrusts all over the space this week. More importantly, gold reclaimed former support around $1,675, sparking a false move. This would be very constructive for gold bugs.

You know what they say about failed breakdowns: “From failed moves come fast moves in the opposite direction.”

Source: All Star Charts, with data provided by Optuma

While this might sound like a quaint platitude, there is a lot of market psychology behind failed breakdowns, or bear traps as they’re often called. When price breaks a well-defined support level, like $1,675 for gold, bulls get stopped out and bears pile in short. If price reclaims that key level, the bears could become trapped, and forced to buy-to-cover. At the same time, bulls who had previously been stopped out are more inclined to get back in again. These supply and demand dynamics can cause a spree of buying and lead to a sharp move higher. 

2/ Confirmation in 63-Day Highs

With the S&P 500 running into a logical level of support, breadth has been slightly improving as fewer individual stocks are accompanying the index at its recent lows from last week.

With buyers entering the market and the index making fewer lows than it did in June, the odds could be in favor of equities experiencing some mean reversion.

Source: All Star Charts, with data provided by Optuma

While bulls still have a lot of work to do before we could have conviction that the bottom is in, we could be due for a pause in selling in the short term. The next key piece of information could be a bullish thrust in the 63-day highs as confirmation of the shorter-term thrusts that have taken place since this summer.

3/ Energy Hasn’t Broken Out Yet

Although energy has experienced a strong rally from its pandemic lows, it’s still below overhead supply. This is particularly true at the large-cap index level.

Below is the large-cap energy sector ETF (XLE) being rejected by a shelf of former highs.

Source: All Star Charts, with data provided by Optuma

It’s no coincidence that these stocks stopped going up at the same level they did in 2007 and 2014. There’s plenty of market memory and overhead supply here.

While it could take time, it wouldn’t be surprising for them to eventually resolve higher from these levels as they have had plenty of time to absorb all the supply. The final resolution could be higher, in the direction of the underlying trend.

4/ Volatility Cools in Crypto

With traditional markets experiencing increased volatility in recent weeks, cryptocurrencies have barely moved.

The chart below shows Bitcoin’s volatility (as measured by the Bollinger Bandwidth indicator in the lower pane) back in the compression zone as prices coil in a tight range above the critical former 2017 highs.

Source: All Star Charts, with data provided by Optuma

These periods of volatility contraction are often followed by wild moves in either direction that tend to set the tone for the coming weeks and months. This suggests a strong move in BTC could be imminent.

Originally posted 4th October, 2022

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