Gold Breaks Support – Silver Holds
On the heels of an advancing US dollar and a stock market which is challenging all-time highs, gold fell $19 or 1.5% this week. Broke the “neckline” support level at $1,283 (black) of the head & shoulders pattern (blue callouts) in the expectation we have been highlighting for the last several weeks. The final trade for the holiday-shortened week on Thursday afternoon as of the close of the New York COMEX futures exchange was $1,276. This triggers a lower target of $1,220 (green), calculated as equal to the amplitude of the “head” portion of the head & shoulders pattern ($63), and subtracted from the neckline.
In rare cases, former necklines can exceed on a temporary basis. Yet the pattern will still manifest toward the lower target. Gold could thus bounce back to re-test the broken support at $1,283 plus or minus a few dollars over the next week before continuing to decline.
However, for the pattern to remain valid, under no circumstances should the downtrend (blue) which has defined the right half of the head & shoulder pattern be exceeded, even on an intraday basis. This lower target negation level now comes in at $1,305 (red). This is the level we would need to see exceeded to show us that gold’s head & shoulders pattern could abort and that a rally to finally exceed 2016 highs was set to begin.
This lower target negation level is declining each day – but the key is that it would need to be broken before it merges with the neckline ($1,283) in mid-May. Since the downtrend is inherently declining, after mid-May the higher of the two technical levels would need to be broken to invalidate the lower target.
Barring such, our bias should be lower for gold for the intermediate future.
Gold Miner Comparison
Checking in on the gold mining sector for either confirming or negating signals for the above thesis. We see no significant divergences. Below we show the GDX senior gold mining fund on top & the GLD (gold bullion proxy) fund on bottom. Starting off with the February 20 peak in gold at $1,345. Note how both funds have both broken below their recent March bottoms.
What we are typically looking for here is a divergence signal. When gold or the gold miners are performing relatively better at major inflection points. Such divergences can be forbearers of turning point for the entire sector.
As of present, both are properly aligned, and thus keep the door open for our lower targets.
Silver Maintains Recent Range
Interestingly, silver fell only by a single cent last week, down to $14.95 as of the final trade on Thursday afternoon.
It is rare to see gold fall by almost $20 in a week yet for silver to barely budge. This is a potential positive divergence that we will be watching for over the weeks ahead. Of course, silver had underperformed gold for the better part of the last year. This is only a brief hint of an initial positive divergence. Still, more important longer-term signals must inherently start as shorter-term divergences. So we will continue monitoring this trend over the months ahead.