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Gold bulls caught in a trap: medium-term outlook

It has been an exciting summer for gold bulls with prices rocketing from $1270 at the end of May, to a peak of $1557 at the beginning of September – a hot $287 or 22.5% return. The question now of course is whether prices can continue higher through the chillier months, now that we have hit overbought conditions on the weekly chart.

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The answer could lie in the recent candle formations on the weekly chart so let’s have a close-up examination.

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Candle A does not quite qualify as a ‘dark cloud cover’ pattern because the close is not below the 50% line of the previous blue candle. However it does clearly show how gains could not be maintained with the long upper wick and red body, with a close below the previous week’s close.

The next candle is far more negative, with a new high just above candle A, followed by a sharp reversal leaving a much longer upper wick. The candle close is well below the previous week’s (red candle A) low and has eaten well into the two blue candles in the middle of August.

This leaves a clear shooting star candle formation. It clearly shows how sellers overwhelmed the market just after a new recovery was posted at $1557, leaving almost all the new buyers for the past two weeks facing potential losses and even some of the buyers in the middle of August also under water.

As I write now the current weekly candle is the third red-bodied candle in a row taking prices towards the four-week low of $1481. This of course lands more gold bulls in loss-making positions and adds pressure to the downside, intensifying the bull trap in the medium term.

Is there any hope for the bulls now? On the daily chart we are testing three-month trendline support at $1483/81, offering bulls the opportunity to regain control in the short term at least. A bounce from here targets minor resistance at $1492/93 and $1497/98 but strong resistance at $1502/03 is likely to see a renewed effort from the bears. Short positions here need stops above $1506. A break higher targets a selling opportunity at $1513/1514. Place stops above $1518.

A break below $1480 is another sell signal, therefore, targeting $1470, perhaps as far as good support at $1450/48. With indicators already entering oversold territory on the daily chart, we should expect a good bounce from here on the first test at least, bearing in mind we are in a strong longer-term bull trend.

Silver has followed gold higher of course and has even been leading the way in recent weeks. However a very clear shooting star sell signal last week has shaken the bulls and trapped all the fresh buyers last week in losing positions.

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Silver has minor support at $17.80/77 but below $17.73 tests strong support at $17.60/57. Long positions need stops below $17.50. A break lower is a new sell signal targeting $17.45/40, $17.20 and probably $17.00.

Gains are likely to be limited with first resistance at $18.18/20 and a selling opportunity at $18.43/46 on any bounce this week, with stops above $18.55.

Jason Sen

Technical Analyst & Trader

For more information and trading education visit Intertrader

The content of this article is the personal opinion of the author and not Intertrader. You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.

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