The Daily Reckoning UK

This Candle Just Pointed To A Move Higher In Gold

Frank Hemsley

by

Posted 14th February 2017

 

Last Thursday in Profit Watch Pro we were looking at gold and I mentioned that the 2 Feb daily candle was a pin bar. Here’s what I wrote:

“In fact, the candle for that day was what I’d call a ‘pin bar’. The price spiked higher during the day, but then closed lower, leaving a long upper ‘wick’ – you can see it if we zoom in:

“That basically means buyers ran out of steam and the price fell back into the close of the day – it’s a sign of exhaustion. And often, when you see a bar like that it can be a hint that there is a reversal coming.”

And a couple of readers wrote in wanting to know more about pin bars.

So I have put something together about these often useful little candles.

A pin bar is a candlestick with a long wick on one side and a short wick, or no wick at all, on the other. Like these ones…

I’m not sure if they’re called that because they look like drawing pins. Or, as someone told me, that it’s short for “Pinocchio bar”, so named because the tail is like a long nose… lying about which direction the price was going to move in.

That’s kind of cute, but they just look like drawing pins to me.

Anyhow, the point is that these are typically reversal bars. The price looks like it’s heading in one direction, but by the end of the session, it’s reversed and gone the other way.

Think about the info any candlestick shows you. The main body represents the open and close prices. The tips of the wicks represent the high and low prices.

So for a bullish candle (one that closes higher than it opens), the top of the upper wick is the highest price in the day. The top of the body is the closing price. The bottom of the body is the opening price. And the bottom of the lower wick is the lowest price in the day.

Let’s zoom in on gold’s daily candle for 2nd February again:

See what I mean about that long upper wick. It shows that during the day the price moved higher, but closed much lower. It’s as if the buyers ran out of puff and the sellers took over.

And in fact, the next day (3rd Feb), the price did continue to fall, as the long lower wick shows.

But the bulls weren’t done yet. The price ended up powering higher from the lows, forming another pin bar in the opposite direction, ultimately with gold closing above that $1,219 level.

I think in this scenario, it’s that second pin bar and where it ends that was significant for gold.
As you can see from the chart, the daily close above resistance, and holding above it the next day, was enough to kick in a new surge higher for gold, taking it to the next resistance level…

Source: IG.com

Of course, pin bars aren’t fool-proof. Like anything, they can give false signals.

I mean had you shorted gold after seeing that 2nd Feb pin bar, betting on a big reversal, you’d have come unstuck when the 3rd Feb ended in a pin bar the other way.

But when you see these types of candles form, they’re certainly worthy of a closer look to see if there are any other signs that point to a potential move you can trade, such as a close above a resistance level or moving average – something we’ll look at another time.

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