Traders who went short gold in May are beginning to consider covering their short positions.

The collapse of the gold price was a classic trend change. It started with a retreat from a strongly defined resistance level near $1,365. It continued with a move below the long-term uptrend line that had been in place since December, 2016. It was confirmed with compression and crossover in the Guppy Multiple Moving Average indicator. Both traders and investors agreed it was time to sell, and the downtrend accelerated.

The strongest historical support level is near $1,210 and traders will prepare for a potential rebound from that level. A support level is when price has fallen to that level and then rebounded and developed a new uptrend.

Traders looking for similar multiple confirmation signals of a classic up trend change will be disappointed. When the gold price rebounds, it tends to do so rapidly without any consolidation activity. The gold price is characterized by trend rebounds from pivot point lows. Those are steep and rapid rebounds that have the characteristics of a short-term rally but also have a habit of developing into longer-term sustainable trends.

The rally starting December, 2016 is the best example of that behavior. Gold fell 15 percent quickly to $1,135 in seven weeks. The 13 percent rebound rally moved just as quickly to $1,292 in 16 weeks. The pivot point trend reversal rally in January 2016 moved 18 percent to $1,263 is just six weeks.

Traders need to move quickly when these trend reversals develop but there is one problem. These downtrend pivot point reversals often start in mid-air. That is, they do not start from historical support levels and this makes it difficult for traders to anticipate where they might occur.

In November 2016 the gold price plummeted past the $1,210 support level on its way to the $1,135 low.

Evidence of a potential pivot point rally rebound includes two features. The first is a slowing of downward momentum. The range from low to high for the week is significantly smaller than the previous weekly ranges.

The second feature is a fast rebound with a significantly larger weekly low-to-high range. That is a large green candle that follows a much smaller red candle.

Traders watch for those potential developments as the gold price approaches the historical support level near $1,210. If the pivot rebound rally does not develop from there, then the task of identifying the trend change becomes much more difficult. It means the next pivot point rebound could develop in mid-air and that requires faster trade management of short positions.

Traders continue to trade the retreat behavior. We use the ANTSSYS trading method for this.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.

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