Friday, 18 August 2017

Gold's Bull Market Final Technical Resistance - Part 4

When i wrote part 3 of this 4-part series (on 6 June 2017), i said it was the final part in this series. It turned out not to be. Well, i did say that maybe i was making this call too hastily. I wrote the article on the day when the price finally poked up the 6 year downtrend line. What i should do was to wait for a few more days to see how prices play out, and the breakout turned out to be a false breakout.


Gold prices showing 2 breakouts from the long term downtrend line.
Gold prices showing 2 breakouts from the long term downtrend line.

The green horizontal line marks the previous as well as height for YTD. Gold prices tested this horizontal green line and went back into the long term downtrend line after i wrote part 3. So how is this latest breakout different than the previous false breakout in June?

There're 2 things.

1.  Gold prices didn't drop back below the long term downtrend line, instead, it retests the downtrend line and bounces off.

2.  While the June breakout pokes its head briefly above the downtrend line in the daily chart, but if you look at its weekly chart, there was no breakout at all. See weekly chart below,

Weekly chart of spot gold from 2011 to 2017 showing breakout
Weekly chart of spot gold from 2011 to 2017 showing breakout

While it's a very positive development for gold bulls with this very eagerly long-awaited breakout of the long term downtrend, the next important level to watch is clearly the green horizontal line of around $1295 level. If we could convincingly break above this level, preferably $1300, and proceed to stay above $1305, which is the November high last year.  Once this target is clear, we'll once again having the kind of bullishness that we experienced in the 1st half of 2016.

Now that we've seen the technical reason for gold's bullishness, there's also a positive support from its fundamental driver. As i mentioned in last previous article Reflection of Reflation Trade? and argue that reflation is good for gold prices, and how both the copper and gold was trapped under similar 6-year downtrend. We have just seen a rather convincing and sustained breakout of Dr. Copper from its 6 year downtrend line for 2 months. Zinc prices, too, are doing something similar. All these bode well for gold prices going forward.

Monthly copper price chart from 2010 to 2017 showing breakout from 6 year long term downtrend
Monthy copper price chart from 2010 to 2017 showing breakout from 6 year long term downtrend

And ah yes, gold is now, for the 1st time since 2011, is entering bull market territory, based on this long term downtrend line. All that occurred in 2016 was nothing but a relief or bear rally (again, from this long term downtrend point of view). Although the best name for the rally in 2016 is Sucker Rally because it sucks many eager bulls into the rally that keep falling since its peak in Aug 2016. Many bulls that bought it in Aug and Sep 2016 are still losing money. If you lose money in a market after 12 months later, can you really call it a bull market? The market is basing in the last 12 months (actually since start of 2015) is the best characterization.

In the short term, i expect gold prices to stay below the green line or $1300 (because DXY is oversold), and so this basing continues, but with a slight bullish bias now that it breaks out of the long term downtrend line.




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