This article was published in Business Times’ column “Chart Point” on 28 May 2018.
Gold Daily Chart Source: Bloomberg, PSR
The recent strength in the US dollar index has resulted in Gold breaking below the key support level at $1300. The $1300 psychological round number area was particularly important because it was the pivot point that kept the bulls intact since January 2018. For the past five months, there were five separate occasions where the $1300 psychological round number halted the selloff shown by the yellow highlighted boxes in the chart.
It was only until recently where the bears finally broke below the $1300 psychological round number on 15 May 2018. Once Gold broke below the $1300 zone, the selloff exacerbated as the long speculators were forced to cover their positions with their sell stops being triggered. On the day of the bearish breakout, Gold fell to a low of $1289.
However, with the past few days of price action, there was an absence of the bearish follow-through. This suggests a possible false bearish breakout scenario. Usually, when price breaks below a significant range low, the trend shifts to the downside and the bearish momentum tends to sustain and accelerate. However, we are seeing an opposite price action in Gold currently.
Since 16 May 2018, Gold has been consolidating within a $12 range with most of the candlesticks being doji, signalling indecision in the market. One of the more interesting price action happened on 21 May 2018 when Gold broke below a crucial uptrend line intraday. The uptrend line was established from the December 2016 low making this a substantial support to watch. At the end of the day, after a major tug-of-war between the bulls and the bear, the bulls succeeded in defending the uptrend line and closed near the day’s high. As a result, a bullish hammer was formed off the long-term uptrend line suggests a reversal higher next. The hammer’s low of $1282 could very well be the next Higher Low (HL) point for this long-term uptrend.
On a longer-term perspective, gold tends to create false bearish breakout first before rising back into the general uptrend especially for this current uptrend that began in 2017. For instance, the selloff since August 2017 led price into a consolidation between the $1303 range high and $1260 range low. Gold stayed range bound for approximately nine weeks before a breakout happened. As Gold broke below the $1260 range low on 7 December 2017, the selloff accelerated due to the many long speculators getting stopped out. However, it took the market just three days to form the next bottom. Note the bearish follow through after the initial selloff was weak too. In total, Gold fell as much as -1.9% below the $1260 range low before the uptrend re-emerged.
Thus, the current price action mirrors the 2017 false bearish breakout scenario. Using the 21 May 2018 low of $1282 suggests a -1.7% loss from the $1307 range low. A reversal back into the uptrend should be next in line.
In addition, the strong bullish breakout above the immediate $1296 range high and the bullish close above the $1300 psychological round number on 24 May 2018 further validates the bullish narrative. Expect Gold to re-target the $1350 – $1365 resistance area next and a further break above the $1365 highs for the uptrend to establish a new Higher High (HH) point.