Gold: Megaphone Pattern Targets $2,575 In 2020

We continue to be extremely bullish on gold and silver. Governments around the world are printing money, the coronavirus pandemic shows no signs of going away, and the economic consequences of the pandemic continue to ripple throughout the global economy. Tensions between China and the US continue, with a US election in the fall that appears destined to increase political uncertainty and disruption. We recommend buying gold and silver for the long term, while using corrections in the short term to either day trade or build a long-term position.

How to Trade Megaphone Patterns

The formation in gold has been identified as a megaphone formation. This pattern consists of a minimum of two higher highs and two lower lows. The pattern is usually formed when the market is highly volatile and traders are not confident about the direction of the market. It offers multiple opportunities to traders. The pattern may not be enough to make trading decisions and multiple analyses may be required to identify entry and exit points.

Gold

The daily Variable Changing Price Momentum Indicator (VC PMI) average price is $1942. The extreme level above (Sell 1) is $1963, Sell 2 is $1989, and the Buy 1 level is $1922 and the Buy 2 level is 1896. On the right of the chart is the weekly data, where $1963 is the weekly average. The weekly Buy 1 is $1901 and Buy 2 is $1855. The weekly Sell 1 is $2009 and the Sell 2 level is $2071.

The market trading above the $1942 average activated a target of $1968, which is the daily Sell 1 target. The target was completed at 5 am this morning at $1968. Once the target was completed, the VC PMI goes neutral. The next signal on a close of the 15-minute bar, was short since it closed at $1962. The daily target was $1942. We didn't quite come down to $1942, but we came down to $1945.30.

Courtesy: TOS

Gold then came down to a major level of support. It is the bottom end of the megaphone formation. The first leg went from $1795.20 to $2089, which was completed on the 7th. The second leg is in the process of being completed. The second-leg target is about $2338. Then it goes into a fourth-wave correction down into the $1795 area, which looks to be the bottom of the fourth leg. The final target in this formation, which is a five-wave pattern, the target is about $2575. This pattern happens when the market is entering an acceleration phase, which is what gold appears to be entering. Gold has broken out of some long-term resistance. March 16 was the low and I don't think we will see that price again for a long, long time.

Fundamentals

This bullishness reflects the fact that gold is transitioning from a commodity into a currency. As the government has become the buyer of last resort and is printing more and more money, investors are shifting their assets into gold and silver. Many believe that these monetary policies are extremely inflationary, and they do not look good for the US dollar. Printing so much money devalues the dollar, especially since it is a fiat currency not backed by gold, silver, or any physical asset. The dollar's purchasing power has been falling since 1971 when the US dollar was taken off the gold standard.

We focus on trading gold because gold has become a currency and is a leading economic indicator of the monetary system. It is the opposite side to the US dollar. If the US dollar is going to fall and stop being the world's reserve currency, then gold and silver will rise significantly. Fiat currencies are going to go to zero since every country on earth is printing currency in response to the pandemic. The more currency that is printed, the more devalued that currency becomes.

Gold

So are we at the top of the market or are we in a correction before gold zooms even farther up? Even on the daily VC PMI data, the market looks like we are at a point where the market is going to make another move up. Every time we come down in gold, it has sped back up. Every time gold reaches the Buy 2 level, there is a 95% chance that buyers will come in and the market will revert back to the mean or higher. On August 12, gold came down and completed the second leg of a correction. The market then reverted back above the daily and the weekly targets of about $2009. The market reached $2024 from a low of $1874. The market was then set up for the third leg, which is usually twice the length of the previous leg. $2341 is potentially going to be completed by September 4. If the market comes down and closes under $1874, it would negate this bullish trend. If it does not do that, the target is $2338. $2009 to $2071 are the targets that are going to be active for the rest of the week.

For day trading, we are neutral. Long term, we are long gold and silver, holding Leaps and derivatives. We are looking for an opportunity to buy on any corrections. We believe that the prices in gold are just beginning to reflect the global economic conditions. The pandemic is having a major negative economic effect on the US and the world. We are going to have continuing problems in many states and cities. We are not returning to the old economy any time soon. The damage is deep, profound, and global. Many businesses are still closed. Many employees still can't return to work. However, this is an excellent opportunity to use these markets to greatly improve the financial situation of your family. We are just at the beginning of an incredible move up in gold.

There is always the possibility that the market will correct or collapse, but the major reason that happened last time was major manipulation of the gold market. Central banks and major institutions sold gold short on the paper market after the uptick rule was eliminated, and that allowed them to pound the gold market down. There was no breathing room for buyers to get out. This tactic artificially reduced the price of gold and silver. They were able to sell unlimited shorts based on supplies of gold and silver that did not exist. If individual investors did what the central banks did by shorting the market, they would be in jail for fraud and price manipulation. It wasn't until March 16 that we saw the significant change in paradigm from gold from a commodity to a currency. The physical gold market got shut down due to the lock-down, so you could not buy physical gold. If you were short and naked, with the idea of bringing the future contract price down enough to buy the physical gold, you could not cover the short position. So the market reverted right up to make new highs. Once we took out the $2011 high, the market entered a completely new price structure.

We recommend maintaining a core position, which you do not trade out of. Short term you can trade the corrections, but keep that long-term long position in gold. The corrections in the gold market are not going to last. The central banks' short-selling policies have changed. They were able to manipulate the price of gold when fewer people were in the market. Gold has maybe 5% of investments in it, with silver even less. But now, that is no longer the case. Far more investors are in gold and silver, making it extremely difficult or impossible to manipulate the price.

We may be on the verge of a deflationary spiral as renters start to default and real estate starts to decline. Thousands of New York apartments are empty. Restaurants are closed. Streets are empty. Deflation may spread across more and more assets. We may also be moving into an era of stagflation like Japan has been in for decades. Things have changed. Embrace the change and look for opportunities. Gold and silver offer excellent opportunities today.

Gold mining shares are on a tear. They are about the only shares paying big dividends. They also don't carry the risk that the equities market carries due to the US Dollar denomination.

If gold comes down to where the VC PMI is forecasting, it would be an incredible buying opportunity. September 28 is going to be the bottom of the next 360-day cycle, which begins September 28. We expect gold to make new lows based on that 360-day cycle.

Give our Mean Reversion Trading service a try to receive regular updates based on the VC PMI.