Incessant Repetition

You’re probably tired of hearing it as much as I am of writing about it but It doesn’t seem to matter where I turn in the markets, most every asset class is in some sort of “hanging by a thread” moment. Stocks broke out to the upside and are coming back to retest that breakout. Failing would be a very bearish sign. Bonds broke to the downside and are coming back to retest the breakdown. Failing would be very bullish.  The topic of this post, precious metals or specifically gold, is no different as you can see in its daily chart below.  It’s pretty obvious the $1310 level is of critical importance as it has tested it 6 times (2 from the underside and 4 from above) and where it sits presently. In addition to price closing Friday’s at horizontal support, it also closed right on the (blue) rising trend line which has acted as support 4 other times. These, combined with the fact price is above a rising 200 day moving average is constructively bullish. On the flip side providing the bears some room for optimism is the bearish negative divergence in RSI momentum, a double top and most recently, lower highs in price .

Extending our look to the weekly time frame it becomes much clearer to see that the current weakness comes at a very logical place as this level had been a point of resistance 3 times in the past when gold was in its protracted downtrend.  After a strong 6 week uptrend that started in mid-May, a period of consolidation is expected and needed. Another feather for the bulls is recent action looks very much like a bull flag which, if it resolves to the upside, would provide a target up near the $1550 level.  

As is always the case, current chart signals are mixed providing fuel for both bulls and bears, supporting both arguments. Having no bias and using a weight of the evidence approach, my expected intermediate term outcome would be a bullish continuation. In the short term though, because the more times a price tests a level the higher the probability it will break it, I am expecting a break below the current $1310 support opening the door for a retest of $1295 area where there exists strong support a likely area to revers. The eventual break above the longstanding $1380 resistance (red horizontal line) opens up the door for the potential of big upside as there is little overhead supply until it reaches $1575 which is what I am favoring longer term.

I do not know what will happen next I am just laying out one possible scenario so please do not take these ramblings as predictions or advice. Regardless of what happens next though, I expect Wednesday’s fed announcement will be the “event” providing the catalyst for the precious metals sector’s next big move.

Gold - Is it Deja Vu all over again?

At the risk of raising the ire of the gold bugs and a bombardment of hate mail, I wanted to check in with how the golden shiny metal has been doing since past looks at the precious metals sector focused only on silver.   

Below is a (very busy) weekly chart of the spot price of Gold since the end of 2008.

If you follow the strong move up from the 2008 bottom, you can see gold peaked in mid-2011 just above $1920/oz. Once it topped it consolidated for nearly 20 months staying above the $1550 red horizontal support level.  You can see it tested that level 4 times at which point on that final 4th touch, the support gave way and began an impulsive move downward.  This is a good example of the more times price touches a specific support level the greater the chance that level eventually gives way. Typically this occurs on the 3rd or 4th touch and this time was no different.  

When these consolidation patterns develop and finally breakdown, you can estimate where the final end of the breakdown will finish. For this pattern that calculation is simply done by taking the height from the peak to the support line (blue vertical line (A)) and subtracting that amount from the breakout level (A’). As you can see this estimate actually worked out to be very, very close to the actual ending price.

Now fast forward to today.  Interestingly, what has set up is almost exactly to what happened in 2011 and should look very similar even to those who don’t want to believe another leg down is possible … a consolidation pattern and 4 touches of the support level.  Using the same methodology as we did in the first break of support (A) above to calculate an estimated target where gold may actually find its next bottom if it should break it works out to be ~$770. Just as it happened in the first breakdown (A), I would price would initially take an impulsive move down and then slow the angle of its decent as it nears its next support level. From a timing aspect and were this to happen I would expect it to take months to reach its final level wherever that may be. One thing will most likely also occur is it wont be a straight line down but ebb and flow frustrating both the bulls and bears along the way. 

From a risk/reward ratio, that lower price objective is a very big drop and something I personally would not want to be long precious metals in my investment account if it were to occur.  If the breakdown does not occur and before i would consider a bottom is in and worth adding to my investment account, i would want as a minimum to see gold make successive higher highs and lows but also a confirmed break above the blue down-trending resistance line. Unless and until this happens, the prevailing trend (down) is in control and needs to be respected.