Weekly Analysis - Gold Fails at Technical Trendline

The failed breakout and reversal back below the long-term declining trendline at $1,280 for gold this past week is a negative development for the entire precious metals complex. From a technical standpoint, it is exactly what we did not want to see as far as a market ready for a major advance.

The failed breakout and reversal back below the long-term declining trendline at $1,280 for gold this past week is a negative development for the entire precious metals complex. From a technical standpoint, it is exactly what we did not want to see as far as a market ready for a major advance.

Even so, we must quantify the nature of a false breakout. Those failed moves that happen at the end of multi-year or multi-decade advances (as we have recently seen in the US dollar) tend to be leading signals of long-term trend reversals. The gold market at $1,280 per ounce is nowhere near the all-time high from 2011 at $1,923. So inherently this failed advance cannot carry the same weight as a long-term top.

Still, the reversal could carry the consequence of a significant intermediate-term decline. By failing to sustain the advance above this same trendline once again, gold remains in a negative posture for the time being, until proven otherwise.

(See Image A)

For the week as a sum, gold fell 0.9% or $12 to close at $1,266 as of the final trade in the electronic access market in New York on Friday afternoon.

Gold’s next initial support comes in at $1,230, which is the rising (dashed) trendline visible on the chart from the January low.

Beware Early Celebrators

We have been making the case over the last year that many technical-based traders would be waiting for this pending breakout signal to begin buying, as clear long-term trendlines are visible to many who follow such charts.

However, on Tuesday when we first saw the breakout attempt, we noted the necessity for the advance to hold the $1,280 level at least through this week’s Fed meeting on Wednesday. Also on Tuesday, we observed many premature celebrations throughout the investment world regarding gold’s breakout.

Long-term breakouts must have both conviction and sustaining power. From a contrarian standpoint, the lack of caution by so many investors, including mainstream media outlets such as Bloomberg and well-known commodity analysts, was a bearish setup for the sharp reversal seen the following day. Below are just a few samples:

 

Gold’s Next Support

The consolidation pattern continues to get tighter, and a big move is coming in one direction or the other. Gold could still find support above $1,230 and then stage a legitimate breakout in July or early August. But a failure at the $1,230 rising support would trigger a short-term topping formation, which would target $1,140 initially, and open the door to a retest of the 2015 bottom at $1,045.

We do not want to get too far ahead of ourselves at this juncture, except to say that gold remains in an inherently neutral consolidation following this false breakout. The bearish resolution would result in either a retest of the 2015 bottom at $1,045 or even a new low, while the bullish resolution would result in a significant leg higher across the entire precious metals complex targeting $1,535 within 6-12 months. Fundamental drivers will be causing these moves, but we will be able to observe the signals on the charts before any attributable news is announced publicly.

It is not easy to stay involved at the beginning of a suspected bull market for a reason – whiplash is the term for the price action we are observing and the unease it causes investors.

Was the entirety of the gain in 2016 just a big false start, before gold heads for a new low? We cannot know until the above pattern is resolved.

The bottom line is short-term risk has grown based on the this week’s failure. However, the book is not yet written.

Fed Meeting On Tap

This Wednesday is the Federal Reserve interest rate meeting, where the Fed is expected to raise rates for the fourth time since December 2015.

Expect lower volatility trading on Monday and Tuesday, with high volatility immediately after the meeting announcement at 2pm, especially if the markets are at all surprised by the Fed decision. For reference, the market is expecting a single rate hike, with language hinting of a further 0.25% hike to come either in July or September, so anything other than this outcome could cause a high-volatility reaction through the rest of the week.

Next week we will examine the Fed policy statement and the impact it has on the precious metals.

The failed breakout and reversal back below the long-term declining trendline at $1,280 for gold this past week is a negative development for the entire precious metals complex. From a technical standpoint, it is exactly what we did not want to see as far as a market ready for a major advance.

Even so, we must quantify the nature of a false breakout. Those failed moves that happen at the end of multi-year or multi-decade advances (as we have recently seen in the US dollar) tend to be leading signals of long-term trend reversals. The gold market at $1,280 per ounce is nowhere near the all-time high from 2011 at $1,923. So inherently this failed advance cannot carry the same weight as a long-term top.

Still, the reversal could carry the consequence of a significant intermediate-term decline. By failing to sustain the advance above this same trendline once again, gold remains in a negative posture for the time being, until proven otherwise.

For the week as a sum, gold fell 0.9% or $12 to close at $1,266 as of the final trade in the electronic access market in New York on Friday afternoon.

Gold’s next initial support comes in at $1,230, which is the rising (dashed) trendline visible on the chart from the January low.

Beware Early Celebrators

We have been making the case over the last year that many technical-based traders would be waiting for this pending breakout signal to begin buying, as clear long-term trendlines are visible to many who follow such charts.

However, on Tuesday when we first saw the breakout attempt, we noted the necessity for the advance to hold the $1,280 level at least through this week’s Fed meeting on Wednesday. Also on Tuesday, we observed many premature celebrations throughout the investment world regarding gold’s breakout.

Long-term breakouts must have both conviction and sustaining power. From a contrarian standpoint, the lack of caution by so many investors, including mainstream media outlets such as Bloomberg and well-known commodity analysts, was a bearish setup for the sharp reversal seen the following day. Below are just a few samples:

 (See Image B)

Gold’s Next Support

The consolidation pattern continues to get tighter, and a big move is coming in one direction or the other. Gold could still find support above $1,230 and then stage a legitimate breakout in July or early August. But a failure at the $1,230 rising support would trigger a short-term topping formation, which would target $1,140 initially, and open the door to a retest of the 2015 bottom at $1,045.

We do not want to get too far ahead of ourselves at this juncture, except to say that gold remains in an inherently neutral consolidation following this false breakout. The bearish resolution would result in either a retest of the 2015 bottom at $1,045 or even a new low, while the bullish resolution would result in a significant leg higher across the entire precious metals complex targeting $1,535 within 6-12 months. Fundamental drivers will be causing these moves, but we will be able to observe the signals on the charts before any attributable news is announced publicly.

It is not easy to stay involved at the beginning of a suspected bull market for a reason – whiplash is the term for the price action we are observing and the unease it causes investors.

Was the entirety of the gain in 2016 just a big false start, before gold heads for a new low? We cannot know until the above pattern is resolved.

The bottom line is short-term risk has grown based on the this week’s failure. However, the book is not yet written.

Christopher Aaron,
Bullion Exchanges Market Analyst

Christopher Aaron has been trading in the commodity and financial markets since the early 2000's. He began his career as an intelligence analyst for the Central Intelligence Agency, where he specialized in the creation and interpretation of the pattern of life mapping in Afghanistan and Iraq.

Technical analysis shares many similarities with mapping: both are based on the observations of repeating and imbedded patterns in human nature.

His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.

Fed Meeting On Tap

This Wednesday is the Federal Reserve interest rate meeting, where the Fed is expected to raise rates for the fourth time since December 2015.

Expect lower volatility trading on Monday and Tuesday, with high volatility immediately after the meeting announcement at 2pm, especially if the markets are at all surprised by the Fed decision. For reference, the market is expecting a single rate hike, with language hinting of a further 0.25% hike to come either in July or September, so anything other than this outcome could cause a high-volatility reaction through the rest of the week.

Next week we will examine the Fed policy statement and the impact it has on the precious metals.

Additional Images

Additional Links