For the week as a sum, gold closed lower by 2.1% or nearly $28 to finish at $1,291 as of the final trade on the New York COMEX on Friday afternoon.
Given the decline seen in gold prices over the past three weeks, let us update our technical road map for the international store of wealth.
For the week as a sum, gold closed lower by 2.1% or nearly $28 to finish at $1,291 as of the final trade on the New York COMEX on Friday afternoon.
On the long-term gold chart below, it is critical to note that the precious metal is now coming back into the zone (green shading) to retest the broken long-term 2011 – 2017 downtrend (magenta line). Oftentimes, markets will break out of an important technical boundary, only to reverse and revisit that same price zone several weeks or months later. This is what is now occurring in gold.
Image A
Why do Retests Occur?
Retests occur as short-term traders take profits following an important breakout.
In a successful scenario, we expect a return to the breakout point to be bought aggressively by second-chance investors – those who missed the initial move, and who now scoop up gold when the market returns to the same price zone.
Interestingly, in this case, gold broke its declining long-term downtrend at $1,265 back in mid-August. Because the trendline was downward sloping, if gold were to retest the technical breakout today it could fall all the way back to $1,250 without violating the line from the upper side. It is important to know that retests of technical trendlines may indeed occur at lower prices than their original breakout points.
Those who only view the price in isolation will be missing an important point: a trend change higher is unfolding on the long-term chart.
Short-Term Support Levels
Although gold could fall back to $1,250 as part of its trendline retest, our highest probability scenario is that it will not fall that low. Instead, we expect a low to form in the $1,283 - $1,301 region, shown below by the green call out.
Image B
This expected low is derived from a confluence of important support levels identified in this range. In technical analysis, whenever we see a confluence of support levels within a narrow band, it represents a high probability target scenario. The specific levels are:
- $1,301 – the 38.2% Fibonacci retracement of the entire July through September rally (light silver line).
- $1,300 – important horizontal resistance (black dashed line), which held prices lower for most of 2017, and was then decisively broken during the last week of August. When a level which formerly acted as resistance is finally broken, it should then serve as support the next time prices return there, as second-chance buyers look to enter positions, having missed the initial advance.
- $1,283 – the 50% Fibonacci retracement of the entire July through September rally (light silver line).
In sum, we have three technical support levels within an $18 price region between $1,283 - $1,301, and this represents a high-probability zone for gold to bottom on the present retracement.
Next Up: 2016 Highs
The actual high two weeks ago was $1,362, and this figure is close enough to the July 2016 peak at $1,378 that we can call this most recent attempt a functional test of the 2016 resistance zone. The retracement that we are now seeing is expected to be the final drop before the next advance brings gold to fresh highs above 2016 levels.
Takeaway on Gold
We watch for lows to develop in the $1,283 - $1,301 range as an ideal short-term technical retracement. We encourage investors to use any price points for spot gold in the $1,200’s as final opportunities for accumulation in these ranges. New highs above 2016 levels should be in store for gold by the end of 2017 if prices continue to hold above the now-broken long-term downtrend on any retest.
Silver is lagging gold on a relative basis, and next week we will focus more in-depth on what to expect for gold’s cousin on the next move.
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