Technical Update: Gold Breaks Trading Channel’s Support

Gold has been oscillating in a tight, 70-dollar range since January 2018, finding support at $1,300 and stalling at $1,370 (Figure 1).

Figure 1. Gold Daily Chart

While the commodity approached its 2016 high several times, the upper boundaries of the range served as resistance on each occasion (upper purple and bright blue trendlines in Figure 2, GLD shown).

Figure 2. GLD Daily Chart

Technical Developments

  • Yesterday (May 15), the commodity declined, breaking below two major supports:
  1. Its 200 SMA (white line in Figure 2).
  2. The lower boundary of the 4-month horizontal trading range (lower bright blue horizontal trendline).
  • Today, the commodity oscillated in the lower portion of yesterday’s trading range, increasing the odds that the breakdown was not “false”.

Implications

  • Breaking below the lower boundary of the trading channel generated a sell signal with a downward target of $1230 (i.e. $70 projected from the point of breakout). Given gold’s prior minor low before entering the trading range ($1,240), and the lack of any major support levels in the $1,230 – $1,300 range, the projection from the trading range could be met quite swiftly.
  • If gold moves back within the trading channel and above its 200 SMA, the bearish implications from the breakdown will be negated and any short positions should be closed.
  • While the lower boundary of the trading range is at $1,300, breaking above the 200 SMA (currently at $1,307) would be required before any long positions are initiated. This is advisable even if the goal is to go long as soon as the commodity goes back within the channel. The 200 SMA served as a support on five occasions over the last 12 sessions (see Figure 1), before finally giving in on Tuesday, so it is expected to serve as a resistance if it were to be retested from below.

Outlook

  • Short-term bearish as long as the commodity remains below its 200 SMA
  • Neutral with a bullish bias if gold moves back above its 200 SMA.
  • Short- and long-term bullish above $1,380, as a break above 2016’s high will activate the previously discussed longer-term upward targets.

Featured image courtesy of Shutterstock. 

Author:
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