I wrote about it last week how the gold futures price oscillator had spiked to a really high level and then turned down which was a bearish signal. It took a while for this signal to bear fruit and gold prices even threw us a big head fake just to see who would be fooled. But the signal’s payout finally came on February 3, 2023, thanks to a strong jobs report.
This week’s chart shows only the daily price bars for gold with one indicator, the Price Oscillator Unchanged line. This represents the price level at which a hypothetical close would keep the price oscillator (as discussed last week) at exactly the same level as the previous day. So, a close above this line means the price oscillator is going up, while a close below it means the price oscillator is going down.
We first saw a close below this line on January 26, 2023, but this signal did not immediately cause prices to start falling. Gold prices are stuck in a very tight trading range, around 1945 levels based on April gold futures. Gold prices wandered around for some time during the day but always seemed to bounce back to the same level at settlement time.
This stability first began to weaken with the reaction from the FOMC meeting starting February 1, 2023, which saw gold prices soar. This helps to illustrate an important principle of price behavior. When prices become extremely stable, as gold prices did, the natural inclination of prices is to try to restore normal levels of instability. Like a top that slows down and eventually topples over, the first sign of instability is a “wobble”. But the first wobble isn’t always the real one.
Gold prices faltered up from this narrow range of closes, but that was the fake move. Now, with the February 3, 2023 reaction to the jobs report numbers, we are seeing the true nature of the breakdown in stability that was the big pullback and fulfillment of the signal from the price oscillator that turned down a week earlier.
The important lesson to be learned from this is the wobble, something I touched on in relation to the VIX index back in 2014. It’s tempting to see this first move out of a tight stable range as a “breakout” to pursue. But it may very well be just the misguided vacillation that draws in the weak and eager traders just for the market to laugh while deceiving them.
