Gold Needs Time to Consolidate

For the week, gold was lower by a nominal $0.40 cents or 0.03% to close at $1,295.20 as of the final trade on the New York COMEX on Friday afternoon.

From a technical basis, it would be extremely healthy to see gold simply consolidate above the $1,283 level through May. For if gold cannot remain above this price on a daily closing basis, we will be looking at a short-term scenario that should target $1,220 over the coming weeks. However, if the precious metal can stay above this key level, a much more positive scenario will unfold by this summer.

Let us turn to the charts.

Head & Shoulders Top?

From a technical basis, the most obvious pattern that we are now studying for gold is the potential for a short-term Head & Shoulder top. This pattern is so-called for its loose resemblance to the silhouette of a person. With a more prominent head sticking above two smaller shoulders, and a neckline of support. The textbook example of this formation is shown at right.

Now let us examine the short-term gold chart. Note how the pattern illustrated has formed in gold above the key (black) initial support level at $1,283, labeled “neckline”.

The right shoulder of the pattern (blue) is presently forming.

Head & shoulder patterns are not considered valid until the neckline support (black) is broken. This is why this support level is so key for gold over the coming week. Let us examine the ramifications should gold either fail or succeed in holding this support level.

Upon a break of $1,283, the pattern would trigger a target of $1,220. Measured as equal to the amplitude of the head ($63) subtracted from the breakdown point ($1,283). This is the highest-probability scenario (red), whereby upon breaking the neckline support gold would decline in rapid fashion toward the outstanding target.

Investors are advised to watch for this scenario over the coming week because if the pattern triggers, better buying opportunities will lie ahead.

Note that should the pattern indeed trigger, it does not tell us anything beyond the $1,220 target. We must use other forms of analysis to gauge whether gold will find long-term support at that level or not. This will be examined in future articles.

What if Gold Holds Support?

Technical targets are not considered valid until triggered. A daily close below $1,283 is the trigger for gold’s immediate lower target.

If gold can defy the odds and prove our leading signals wrong, an interesting scenario will be set up by the end of May. Note that the (blue) primary channel support will be meeting with the (black) initial neckline support by late May at $1,284. This dual-support will also be near the 61.8% Fibonacci level of the entire August 2018 – February 2019 advance. Coming in at $1,276 (green circle).

When three separately derived support levels all fall within an $8 band, it increases the probability that the zone will in fact hold.

However, gold needs to consolidate sideways for the next six weeks to allow the support zones to converge. Weakness sooner will invalidate the potential.

This less likely alternate scenario is shown by the green arrows.

Takeaway on Gold

In sum, if gold can manage to simply consolidate for the next six weeks, it will increase the odds that it will not, in fact, break down below the neckline of the head & shoulders pattern. Gold could then continue to rise along with the primary support trend (blue), in preparation for a final break above the 2016 high at $1,378 by Q3 of this year.

Head & shoulders patterns are known to abort in this manner on rare occasions. The key is that the neckline support – presently at $1,283 – must not be violated on a daily closing basis.

The work for gold in establishing a stable pattern for the remainder of the year is thus directly in front of us.

CHRISTOPHER AARON
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. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third-party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.