Given the decline seen in gold prices over the past three weeks, let us update our technical roadmap for the international store of wealth.
For the week as a sum, gold closed lower by 2.1% (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). This is to retest the broken long-term 2011 – 2017 downtrend (magenta line). Often, markets will break out of an essential technical boundary. Then they will reverse and revisit that same price zone several weeks or months later. This is what is now occurring in gold.
Why do Retests Occur?
Retests occur as short-term traders take profits following a vital breakout.
In a successful scenario, we expect a return to the breakout point. We expect to be bought aggressively by second-chance investors. Investors may miss the initial move. So they then 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. The trendline was downward sloping. If gold were to retest the technical breakout today, it could fall all the way back to $1,250. This is without violating the line from the upper side. It is important to know that retests of technical trendlines may indeed occur at lower prices. Prices lower 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
Gold could fall back to $1,250 as part of its trendline retest. Yet, our highest probability scenario is that it will not sink that low. Instead, we expect a low to form in the $1,283 – $1,301 region. We show this below by the green callout.
This low derives from a confluence of significant support levels identified in this range. In technical analysis, sometimes we see a convergence of support levels within a narrow band. This 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 – significant horizontal resistance (black dashed line), which held prices lower for most of 2017. Then decisively broke during the last week of August. When a level that formerly acted as resistance breaks, it should then serve as support the next time prices return there. 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. 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. This figure is close enough to the July 2016 peak at $1,378. 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. This next advance will bring 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 last opportunities. Additionally, this is for accumulation in these ranges. New highs above 2016 levels should be in store for gold by the end of 2017. This is if prices continue to hold above the now-broken long-term downtrend on any retest.
Silver is lagging gold on a relative basis. For next week we will focus more in-depth on what to expect for gold’s cousin on the next move.
Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. This is where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq.
Technical analysis shares many similarities with mapping. They both base on the observations of repeating and embedded patterns in human nature.
His strategy of blending behavioral and technical analysis has helped him and his clients. It helps to identify both long-term market cycles and short-term opportunities for profit.
This article is third-party analysis. It does not necessarily match views of Bullion Exchanges. Readers should not consider it as financial advice in any way.