Pump and dump – a classic example on gold!

December gold futures - weekly chart
December gold futures – weekly chart

For those of you reading this analysis who are perhaps unfamiliar with the term, pump and dump, let me explain it briefly for you. It is a slang term used to describe how naive investors are lured into buying worthless stocks at high prices, and is a technique  employed by all the best boiler room scam operators. It is very simple and very effective and premised on convincing those naive enough to believe that a stock they have never heard of is about to skyrocket for some quick and easy profits. Needless to say once the stock is purchased, pumped up by the hype and the operators having sold out, the price promptly collapses. Strangely enough the same technique is employed by the market insiders and operators, and today we have seen a classic example clinically executed in gold futures.

Regular readers of this blog will know that for some weeks I have been wary of the move higher in gold, and on two occasions suggested there was a trap up move being set. Today has seen the trap door released with the collapse in the price of gold which has lost over $30 per ounce on the day, and no doubt culminating in a blood bath for those traders who do not incorporate volume price analysis into their trading methodology. Had they done so they would have seen, like me, a text book example of a volume price anomaly, which even Mr Magoo would have had difficulty missing. This is volume price analysis 101, where we have extreme levels of volume on the weekly chart with a consequent narrow spread of price action. On such high volumes, the market should have risen, it has not. The conclusion is clear and obvious – this is selling volume from the big money, and it is not a question of if a market is going to reverse but simply when. And the initial phase of this reversal was duly delivered in today’s gold trading session.

In addition to the volume price scenario, the deep resistance overhead at the $1360 per ounce price region has also played its part in today’s carnage. This price area is now both deep and wide, and as a result we are likely to see a similar pattern unfold as we saw in early March, with gold retracing from this level back to test the $1240 per ounce region.

Given the extent of the shift in volume in last week’s gold trading session, the retrace on this occasion is likely to be deeper and more sustained, and we could well see gold prices move back below $1200 per ounce and test the $1180 region of late 2013 in the medium term.

December gold futures - daily chart
December gold futures – daily chart

Moving to the daily chart, the end of last week was characterized with extreme volume driven by fear, yet with no significant price move higher associated with this level of activity. In addition, the volume here is falling, once again signalling an end to the current trend higher. As we can see on the daily chart gold has just breached the platform of support at the $1315 per ounce region with the next level at $1275 followed by another at $1265. If both these are breached (as expected) then gold is likely to move through $1240 and further down, as outlined above.

Finally the reason given for this dramatic sell off is that confidence has returned and the problems in Portugal were over stated. This is what the media will tell you as it is a simple and quick sound byte. After all, no-one would believe that pump and dump is alive and well in the gold futures market today – would they!!

By Anna Coulling

About Anna 1027 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

5 Comments on Pump and dump – a classic example on gold!

  1. Thanks for the analysis. A simple approach and understandable look at volume price analysis or VSA as some might call it. May have to purchase some of your books.

    • Hi Dwain – many thanks for your kind comments and you are more than welcome. As you say, VPA or VSA is based on some very simple principles. It was good enough for the great tape reading traders of the past, and is good enough for me!! If you are going to buy any of the books please start with A Complete Guide To Volume Price Analysis – its the cornerstone to everything else! All best wishes and thanks again – Anna

  2. Hello Anna
    I have an IBFX account, and the picture of the volume I see there is different!
    I can not attach pic, but the big volume in your weekly chart.
    And in another broker I have the same big volume but is in my chat on the last candle (the red one) no at the narrow spread! this change all the picture!
    Where I can see the real volume like you?
    Thanks!
    Dudy

    • Hi Dudy – many thanks for your comment on gold, and the volume that I use is from the futures market. So the volume you see in the chart is for the gold futures contract for December (GC). The platform that I use in the analysis is from Ninjatrader which is free to download – it’s a great platform. The data feed I use with it is from Kinetick which is the one recommended by NinjaTrader. Again, a great feed which covers virtually all markets for both tick and time based traders. I combine these with my brokerage account with Interactive brokers, and using this combination I can then avoid paying exchange fees, under the CME waiver program. I hope this answers your question and once again many thanks and good trading – Anna

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