Gold and silver power higher as expected
In last week’s article we were looking for continued weakness in the US dollar and indeed, as predicted, the US Dollar Index has broken down about 200 points to around the 92.50 area. This has helped to power gold and silver higher as a weaker dollar often does.
The rally in precious metals has been a theme of mine since the start of the year and happily both metals are seeing significant gains in the first four months of 2016. Recently I wrote how gold was entering a consolidation or sideways trend after the strong move higher in March, which rejected some important resistance levels as expected. This consolidation phase ended last week. Initially we had a false break higher the week before when gold spiked to 1270 – I thought this was the long-awaited breakout but I was proved wrong and in fact my long positions were stopped.
Last week proved to be the real deal, however, and we made it as far as 1303 on Monday this week. The next major target for the gold rally is the 2015 high at 1306, so we haven’t quite made it that far yet this week. Although we are becoming overbought on the daily chart I would not pay much attention to this and would consider any weakness to offer buying opportunities in the bull trend. As long as we hold above the 1285/1283 support level, bulls remain in full control and sooner or later we should break up through 1306 to target quite important longer term 200-week moving average resistance in the 1320/1325 area. This will be the next major challenge for the bull trend as you can see in the weekly chart below.
Last week’s big blue-bodied candle shows a powerful breakout above the March highs in the longer-term chart, emphasising the strength of this bull trend. If we manage to get through the 1320/1325 resistance this month, we could push on to 1345 and eventually as far as the 1380/1390 area in the summer months.
My worry would be if gold starts to sink below 1250 and I would have to wonder if the failure to beat the 2015 high was signalling the start of another leg lower in the longer-term bear trend.
I have been monitoring the significant bottoming pattern forming in silver for almost a year and wrote a few articles on this subject recently. I wasn’t sure exactly what this pattern was but it looked like a combination of a reverse head and shoulders, rounding bottom and even a cup and handle all thrown together in one big nine-month bullish pattern. One thing was for sure, this market had to break higher eventually. Exact timing is always impossible, but finally we saw this break in April and, once through the blue 100-week moving average line, the breakout was confirmed with a strong move up through the mid-2015 high of 17.77, reaching as far as $18.
We have stalled at this round number in overbought conditions, with a negative candle formation on Monday warning of short-term profit-taking to ease overbought conditions. However, again I see any weakness as a buying opportunity. Minor support at 17.50 has already been tested and has held well but I would not be surprised to see better support at 17.25/20 tested later in the week. This could hold the downside in a correction phase, though if prices were to fall as far as 16.80/75 I would see this as an excellent buying opportunity and a good chance of a strong bounce from here for a resumption of the bull trend.
My next target on a break above $18 is the 2015 high and Fibonacci resistance at 18.50/75, so a break and close above 18.80 should be seen as yet another buy signal.
Technical Analyst & Trader
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