Saturday, 30 July 2016

Gold Bull Market's Final Technical Hurdle

The gold spot price is about to cross the final - and most significant - resistance point, marked as
"D" in the chart below.

Daily gold spot chart for the last 12 months as of end of July 2016
Daily gold spot chart for the multi-year gold bear market from 2011 to 2015 (inclusive)
(Click chart to enlarge)

Before analyzing this final technical hurdle, let's first look at the 1st 3 preceding important resistance, which all occurred this year 2016. They are marked in the chart below as "A", "B" and "C".

Daily 12-month gold spot price as of end of July 2016
Daily 12-month gold spot price as of end of July 2016
(Click chart to enlarge)

After an extended gold bear market that lasting for some 4.5 years, it finally comes to an end (Some say, "not yet!". Will deal with this later). The start of this gold bull market is confirmed by the crossings of these technical price points. Let look at each of them in detail.

A   This is the price where the rising gold price intersects with the intermediate downtrend line (marked as "DTL1") on 11 Feb. What's even more significant is that this intersection accompanies the formation of a bullish cup-and-handle pattern. Look at the big price spike, this is the market's indication of this important price point.

This day - 11 Feb - isn't just an important turning point for the gold market, it's also an important turning point for the equity market as it marked the bottom for equity indices like SPX for the year (so far). On that day, the Fed turned its hawkish tone into a dovish one. This is the macro-economic force that drives this technical.

B   Less than 2 weeks after "A", the gold market gets another nice confirmation at "B" - a golden cross for gold market. This isn't a very significant technical price point, but it's still a nice additional confirmation for the gold bull.

Again, its technical importance is indicated by a larger than average price rise.

C   This price resistance is significant for several reasons. The 1st is that it's a psychological round number of 1300. The previous price resistance is another round number 1200. The other significance is that this is the price peak of previous year, and it also has quite a bit of congestion at this level in year 2014.

Because of the strength of this resistance, the price failed its 1st attempt to punch through this level at "C1". After this failed attempt, the gold price retreats to its previous strong resistance, which now acts as strong support at "E". The strong rebound from "E" on 3 Jun confirmed it. Actually this support is doubly strengthened by being the last resistance as well as the 200 day support. In other words, it has 2 supports, not 1 at "E".

After the strong rebound from "E", as the price continues its upward march, it fails once again in its 1300 resistance. But Brexit helps it to break out in one fell swoop. Nothing quite like fear in sending the price of gold soaring.

Needless to say, its price spike at "C2" is exceptional. It takes a big battering ram to punch through a strong wall.

D1  As the price marches upwards after Brexit from "C2", it meets strong resistance at "D1". In fact "D1" is probably the strongest, and the most important resistance of all.

It provides strong resistance because not only it's the peak of 2015 (indicated by the orange line "R1"), and more importantly, it also intersects the long term downtrend for the previous bear market. I would be shocked if it could clear this level on its 1st attempt (unless there was a Brexit-like event occurred at the time).

D2  When price broke through "A", few people believed that the gold's bull market was upon us. By the time the price broke through "C2", there're few doubters left. That is, only the most conservative of technical analysts would still waiting for "D2" to confirm that gold is in a bull market. Technically speak, because we failed at "D1", gold is still in the bear market. We have not broke out the long term downtrend line as far as these hard-nosed technicians are concerned.

In order to convince all technical analysts, including the last few remaining ones, we need to beak out of "D2". But "D2" isn't a fix price level like "A" or "C", but a break out point above the downtrend line "DTL2". Once we punch through "D2" (preferably also rising above 1380), we have truly cleared the final technical hurdle for gold market, and decidedly and unambiguously in a bull market. There will be nobody left standing to say that we're not in a gold bull market.

Because of the strength and importance of this resistance, it will take more than once to beak through it just like it took gold price 3 attempts at "C" level to clear it. In fact, it took Brexit to achieve it. Nobody knows if it takes another "black swan" event like Brexit to pierce "D2", or several attempts (and we may see "D3" and "D4"). Time will tell. But i'm confident that this final technical "bear" hurdle will be overcome sooner or later.


In the period between the start of this year and Brexit, the U.S. 10-year bond yield range bounds between 1.64% to 2.3% levels. After Brexit, gold moved above 1300, and 10-year bond yield plunged to 1.3%. It has recovered since, but has not been able to breach the 1.6% level. This strong support for 10y bond yield early in the year pre-Brexit is now a strong resistance. This is a very bullish sign for gold.

You could say that this 10y yield level of 1.6% is equivalent to the 1300 level in gold. If yield goes back above 1.6%, gold will drop back below 1300, and vice versa. Keep an eye on this yield level. It's the bond yield that drives gold (and equity) prices, and not the other way around.

10-year Note yield for 2016 as of end of July
10-year Note yield for 2016 as of end of July

I don't really need a breakout of "D2" to convince me because while i rely on technical analysis (for the purpose of short term trading and secondary confirmation), the fundamental, macro-economic factors were all that i require to convince me that we're having a bull market that will last for at least 2 years (probably 4 - 6 years) long. The exact timing will be provided by technical analysis as the gold bull run unfolds in all its twists and turns. So keep your eyes on the chart.

For those who waits for "D2" to cross, they play the safest game, but they lose out on all the impression gains of gold price rise so far this year. Investors like George Soros saw this gold-friendly macro-economic environment coming as early as 2014. So this early bird benefited from the early impressive bull run. Having said that, while those who wait for "D2" to cross have missed out some 25% gains, but there're still a lot more gains coming. In fact, Soros topped up more gold this year (along with Stan Druckenmuiller, Ray Dalio, etc among the growing parade of Wall St billionaire gold investors).

To read the follow up (part 2) of this article 

No comments:

Post a Comment