Corey Rosenbloom: I’m a big fan of so-called “EMA Compression” patterns because they often set-up breakout opportunities from clear reference levels.
Let’s take a look at the Daily Chart “EMA Compression” pattern in gold and what levels are important in the near future.
The main idea here is to recognize the price compression or consolidation between the falling 50d EMA (which has held as resistance since December) and the flat 200 day SMA.
The current falling 50 day EMA rests at $1,680 while the flat 200d SMA resides at $1,665 (Friday’s low).
I also drew a rising blue short-term trendline intersecting the $1,665 area above (another short-term falling trendline also intersects $1,680).
In terms of structure, due to a series of lower lows/lower highs and a bearish EMA structure, price remains in a short-term downtrend established since November 2012.
However, it’s often best from a trading standpoint to treat potential future breakouts from a neutral perspective instead of trying to predict which direction price will break.
Breakout trades profit from a quick “feedback loop” or rush of activity driven in part by one side of the market being caught off-guard and thus rushing to exit their (now) losing positions.
For a short period of time, both sides of the market are “doing the same thing” for very different reasons (in the case of an upside breakout, buyers would be putting on new positions while sellers may be taking off old positions at a loss – buying to cover).
The hourly chart provides a more detailed look at the short-term levels and potential future targets on a breakout:
Again we see the blue compressing trendlines forming a “triangle” pattern from $1,665 to $1,680.
A breakthrough beyond one of these levels could lead to a quick impulse toward the prior inflection high at $1,700 or $1,640 (levels for intraday traders to target).
Beyond that, a firm breakthrough above $1,700 would trigger a short-term trend reversal as price creates a higher high after a higher low and would trade above the daily EMAs.
A continuation of the move above $1,700 could target the $1,750/$1,760 prior swing high from November.
On the other hand, a ’surprise’ breakdown under $1,640 could set up a sudden play toward the $1,600 prior support from August.
Take these levels and potential outcomes into your trade planning and analysis.
For educational reference, here is my prior post on “EMA Compression” that occurred in AAPL (you can view the outcome now).
Related Tickers: iShares Silver Trust (NYSEARCA:SLV), Miners ETF (NYSEARCA:GDX), iShares Gold Trust (NYSEARCA:IAU), SPDR Gold Trust (NYSEARCA:GLD), Ultra Gold Trust (NYSEARCA:UGL).