Gold and silver starting to form bullish bottoming patterns
Gold and silver were a big focus of my weekly articles in the second half of last year, as we approached very important support levels in the longer-term bear trend. I saw the mid-1080s as a potential floor in gold and, although we initially bottomed at 1077 in the summer of 2015 and managed a strong rally as far as 1190, the price collapsed in the autumn hitting a low point of 1045.85 in December. This overrun by about $40 is only about 3.5%, which is not really very much when you consider prices collapsed from 1920, a drop of nearly $900.
December initially caused me to give up on my hopes for a gold recovery, but a double bottom formation at 1047/1045 allowed me to believe again! However, as I told my gold daily technical analysis subscribers, the big level to watch was 1079/1080. We had trouble breaking through this at the start of the week and even tried some small shorts here, but yesterday gave us the longer-term buy signal. We were looking for a break above 1081 to trigger a big move up. This now allows us to see more clearly the formation of the bottoming pattern.
In the daily chart above you can see two red arrows, one in the middle of November and one at the end of December. These low points indicate to me the left and right shoulders of a bullish inverse head and shoulders pattern. The double bottom in the first half of December looks to me like the head of the inverse head and shoulders pattern. You can see the pink trendline, indicating the neckline, and we managed a close above that on the second day of trading in January.
However, I was looking for a break above 1080 for a better confirmation that the pattern had formed. In the first two days of January we tested this level, but could not close above it. Yesterday on the third test, we rocketed higher… the rule of three coming into play again in technical analysis.
The chart below shows one final confirmation of a bullish breakout.
The thick green one-year downtrend line needed to be broken for me to be comfortable in calling a longer-term bullish move in gold. It helps that we are now back above the longer-term 50% Fibonacci support at 1087, and you can see in the chart above that we already reached the first target, the September low at 1098 and 38.2% Fibonacci resistance at 1101. At this stage we have become overbought in the short term after strong gains this week, so there is always the chance of a little profit-taking before the next leg higher.
If we are lucky enough to see a retracement back into the low 1080s, this would provide a second buying opportunity and perhaps the last chance to get on board before a bigger push higher. Once through 1102, we can test the 100-day moving average at 1109 and above here push on to stronger resistance at 1118/1120. A break above here could then quickly target quite strong resistance at 1135. This looks to me like the biggest obstacle ahead for gold over the next few weeks.
Silver has not experienced the same explosive move higher this week, but this is likely to just be a delayed reaction.
If you read my previous articles you will already be aware that silver had collapsed to some very important support levels. In the monthly chart above you can see how silver is back around 2009 levels and testing the 200-month moving average (the red line). This is a very important support level and, although we did close below it in December, we are holding above the longer-term trendline support which goes back as far as 2003.
An almost 13-year trendline cannot be ignored, especially when combined with a 200-month moving average, placed about $0.25 either side of $14.
Silver is certainly taking its time to decide what its going to do around this major support level and has been hovering around here for almost five months. This has not made holding a long position easy but what it has done is allow a potential bullish inverse head and shoulders pattern to form.
Again, the red arrows to the right of the chart highlight the potential inverse head and shoulders pattern. The lower trendline support across the bottom is that 13-year trendline we saw in the monthly chart, and you can see how it’s doing a fabulous job of attracting buyers. The short pink trendline just above, connecting the two highs in December, is the neckline to this potential bullish inverse head and shoulders pattern.
If silver can eventually follow gold’s explosive move higher and break above this neckline around the 14.30 area, which also coincides with that important 200-month moving average, silver bulls might just start to seize control of this market in the longer term.
Technical Analyst & Trader
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