The last time I wrote about gold was almost exactly one month ago. We spotted a potential bullish pattern in the form of an inverse head and shoulders. Fortunately this pattern did play out and we saw a strong rally in gold up until the third week of January, when it hit the 100-month moving average resistance at 1308. The rally stopped exactly here and for the last three weeks we have seen some heavy profit-taking in gold. The price slumped from a high of 1306 to a low of 1217 as I write on the morning of Thursday 12 February.
This just happens to be a very strong support level and in my opinion there is a very good chance this three-week slump will end here. Let me explain my thinking by starting with a look at the monthly chart for gold.
It is worth noting how the slump in gold tested an important longer-term Fibonacci support level at 1154. Although the low in gold was seen at 1131.85, we did not see a close below here on a weekly basis. These intra-week spikes below the 1154 are perfectly normal around an important longer-term support level. In fact, even on a daily closing basis we only closed below 1154 on two occasions and very quickly recovered on both of the following days. I think this is important because it does indicate that, having given the 1154 level a very big test over a three-month period, it held perfectly. As a result of forming a nice base around this level we saw gold take off at the beginning of January. Clearly a bottom was being formed in gold.
When you see a clear bottoming or basing pattern around a very important support level, it is time to think about a trend change. In fact the longer-term trend for gold is of course very positive after we bottomed out around the $250 area back in 1999. The move lower over the two-year period from 2012 to 2014 was only a healthy correction in this bull trend, in my opinion at least.
Now we need to take a look at the daily chart for some shorter-term clues and a closer look at that basing pattern.
The purple trendlines clearly show the inverse head and shoulders pattern that formed throughout September, October, November and December. This is a big pattern built up over four months and it cannot be ignored, especially when you consider that longer-term Fibonacci support. Both of the shoulders to this pattern bottomed well above that 1154 area. Note how the downward-trending red cloud was also broken at the beginning of January, which in itself generated a buy signal.
So I have hopefully made it clear that, in the longer term, I think gold has formed a bottom and will resume the longer-term trend. Enough said! To finish up, we need to figure out where gold is now likely to bottom out after this short-term three-week correction. The neck line of the head and shoulders pattern is at 1216.50. The 100-day moving average is also exactly at this point. We also have important daily Fibonacci support around the 1220/1219 area. All of these are very important support areas which tie in together at almost exactly the same level. This therefore looks to me like a very low-risk buying opportunity. If I am honest, this looks to me like the mother of all buying opportunities in gold!!!
One thing is for sure, the risk versus reward on this trade is greatly in our favour. Buying gold around the 1220 area with a stop below 1210 gives us a potential $10 loss. The upside potential is many, many times that. In fact, only my first target would be in the 1245/1250 area and, once through there, it should be quite a quick jump to 1275 then 1285 before a retest of January highs at 1300/06. This will be strong resistance again, but an eventual break higher would not surprise me, and then we should be motoring to 1345, our next target.
Jason Sen – Technical Analyst & Trader
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