Well, the past two weeks in the gold market have been very interesting.
After six years of trading in a symmetrical triangle, gold broke to the upside and has clearly invalidated its previous pattern. It has now fallen into a sideways range with $1216.49 at the bottom and $1296.72 at the top.
It is also in an upward-sloping channel. The bottom of this channel is around $1269 and the top is around $1300. MACD is showing strong upward momentum. And RSI is at 70, which is slightly overbought.
Overall, gold is in a strong uptrend. But it is just $10 or so below an extremely difficult area of resistance.
The next week will be crucial in determining where gold will go. If it fails to break through $1296, it will likely test the bottom of the channel at $1269. If that too breaks, it will likely fall all the way to $1216.
In that case, a break of $1216 will complete an ugly “triple top” formation that should send gold much lower.
Alternatively, gold may break through $1300 on the first pass. Or it may fall back to the bottom of the channel and then break above $1300 on the second try. In either of these scenarios, gold would complete a “cup and handle” formation that would be extremely bullish.
So the next few weeks should be interesting to say the least.
One of the main reasons gold is in a such a strong uptrend is because U.S. President Donald Trump and North Korean dictator Kim Jong-Un keep threatening each other and scaring the market to death. Kim Jong-Un has even threatened to launch missiles at Guam while Trump has promised “fire and fury” if North Korea does not stop threatening the U.S.
If this escalation continues, it will be very bullish for gold. But these kinds of things can be unpredictable. North Korea may suddenly back off or at least the two of them may stop making threatening statements to each other.
In any case, this is one of the times where traders should really pay attention to the news on a daily basis.
Another major cause of gold’s rally is continuing weakness in the dollar index. The DXY has now reached a major area of support that goes back to early 2015.
If it falls below this line, it’s a long ways down before it reaches the next area of support at 84.
One mitigating factor is that the DXY has bounced and shown a MACD crossover. However, it failed to break above it’s 10-day EMA and is now headed lower again. So if I was holding USD savings right now, I’d be pretty concerned.
But because gold is priced in dollars, what is bad for it is good for gold. This is is something to keep in mind while trading over these next two weeks.
If the price breaks above $1300, the next area of resistance is $1306.25. This is where gold held before the “stop run” of September, 2016. It should stall there before moving higher.
There is no strong resistance above $1306.25 until $1344.10. So if the price breaks above $1306, a stop at $1288.51 with a TP at $1341.56 will produce a 2:1 reward/risk ratio.
Alternatively, a failed breakout that returns to its current price ($1290.97) can be shorted with a target of $1267.01 and a stop-loss at $1301.70.