Think of the market as a battlefield.
There are two sides and they’re always fighting it out.
Bulls want to see the market rise, while bears believe it should fall.
Both sides have their defensive positions, as well as strategic bases from which they can launch attacks.
Understanding the market along these lines is crucial for traders…
When you start thinking about where each side is strong and weak, you begin to understand where the market is most likely to go.
You see, the market needs liquidity to power its big moves. Liquidity is cash coming into the market through either fresh buying or selling, or from traders exiting existing positions.
All price charts are full of liquidity zones. Frequently, these zones are where other traders have placed their stop loss orders. Bulls and bears will heavily defend these areas.
Breaking a liquidity zone usually results in a burst of volatility.
How quickly that volatility settles down, and how far it moves the market, are crucial clues that can tell you what’s going to happen next.
That’s why being able to spot liquidity zones on a price chart is an enormous advantage.
Let’s look at a chart of gold so I can show you how to do just that.
I’ve labeled the liquidity zones on the price chart.
Once you know what to look for, these zones will be obvious to the naked eye.
The key is to spot areas where prices have stalled. In other words, look for where the bulls and bears have drawn their battle lines.
Zone #1 took shape between April 19 and May 1. Bulls fought hard to establish a floor and were successful in doing so, eventually sending the marker higher to $2,056.
Once gold topped out, prices turned lower, looking to test that same zone on the way down.
As you can see, bulls put up a fight… But ultimately lost on May 18.
As prices broke below the zone, bulls bailed on their losing positions, adding fuel to the breakdown.
It’s too early to say that bears have won the war. It’s more likely they’ve won a battle.
And now, bulls have retreated to another defensive position, labeled Zone #2.
Zone #2 took shape between March 21 and April 2. We’ll see in real time if this zone will be better defended than the first.
What’s clear is that one side will win, and the other will lose.
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If bulls successfully defend this second zone, then the market will likely travel back towards Zone #1.
On the other hand, if bears win again, the market will continue to break lower, seeking out the next support zone.
Are you bullish or bearish on gold?
Let us know your thoughts – and any questions you have – at [email protected].