Gold Explodes High From Fakey Setup (A step by step trade tutorial + recap)
To steal a line from Hannibal from the A-Team, “I love it when a plan comes together.” In the latest weekly trade setups commentary on August 28th, I pointed out the bullish fakey setup on the Daily Gold chart that was followed by a series of coiling inside bars. This was an interesting setup as it had a confluence of factors supporting the latest move higher, and the opportunity to re-enter long positions still exists if the market pulls back to support.
Let’s break down this bullish Fakey setup point by point.
1.) The first thing we are going to look at is the bearish pin bar we had through the resistance on the 18th of August. Being that higher prices rejected, you can logically assume there was some selling within that candle. You would also assume there is some selling ahead of the major resistance level at 1296. This is an important point that we will touch on further.
2.) The next thing that happened was the formation of the mother bar. At this time, we don’t know that the market is going to form 3 consecutive coiling inside bars and therefore it becomes a waiting game.
3.) The market then throws up three coiling inside bars which I mentioned in point #2.
4.) Finally, on Friday the 25th of August, we completed the coiling inside bar with a fakey setup below the mother bar. This is the Daily candle with the large protruding lower tail from the 25th that initially breaks the low of the mother bar, which is then followed by a reversal off the lows. This rejection of lower prices indicates strong bullish interest, and it illustrates the markets desire for higher prices.
Let’s break down the psychology of what is occurring on the chart…
The trade setup starts with the first pin bar to the highs from the 18th. After this forms, you have to logically assume there is a fair bit of short term selling pressure. This is important because those traders who are short will need to start buying to cover short positions. Now considering the market has failed to sell off, this short covering becomes a likely scenario. This buying to cover short positions only serves to fuel the price reversal to the upside.
I often talk my students about a phenomenon where if a price action signal fails, it often leads to an aggressive continuation of the current momentum. Effectively, some might call this a ‘stop hunt,’ where traders become trapped on the wrong side of the market and professionals will now push the market the other way. This will then force the trapped traders to cover their position. As prices keep moving through to new highs and ultimately through the highs of the failed bearish pin bar, the move up is fueled from all that short covering. (I wrote a really in depth article in the member’s area on the subject of failed price action setups, and how they can provide huge clues as to where the market is likely headed.)
After reaching resistance we started to see a series of inside bar candles on the daily chart and some traders were probably still betting that prices would decline based on the original bearish pin bar. We can see on the 25th that the market did liquidate lower significantly during the session which would have fueled even more selling, but … as we can see the market quickly moved back in the opposite direction during that same session forming the daily candle with the large lower tail. We now have several days worth of sellers that have built up short positions that will most likely be panicking and need to cover those shorts, which as I pointed our earlier, will fuel strong buying and see prices move aggressively higher. From here this becomes a self-fulfilling move to the upside…
Current View On Chart and How I’d Be Trading It.
At this point, we remain bullish on Gold and will continue to remain bullish as long as the lows of the pin bar / fakey candle (#4 on the chart) hold. This large bullish pin bar signal now becomes an event area which is effectively a second chance entry if you didn’t catch the first trade. If you did not get into this trade on the original setup, you could look to get long on a blind entry anywhere between the 1276.50 to 1296.00 support area. A more conservative entry would be waiting for an additional price action signal in this area.
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