The bottoming process in Gold continues to progress nicely. We came into the year with little or no Gold bulls on The Street. I seem to recall blog post after blog post detailing the losses that gold investors have had to endure over the past few years. In addition, the media was constantly questioning the long-time Gold bulls and calling them out because gold hadn’t gone up every year as it did for a decade. Rather than focusing on a potential bottom, it was all about the lower prices.
Well, that sort of pessimism is exactly how bottoms are born. So far this is playing out nicely. Today we’re looking at two charts of Gold, one is a daily and the other is a longer-term weekly to help put things in perspective.
Here is a daily bar chart of Gold prices. It’s easy to see the double bottom that got going right around New Year’s after Gold successfully retested last summer’s lows. Momentum was also putting in a much higher low, barely hitting oversold conditions on the second bottom:
There are two more things I’d like to point out here. After a 200 point rally in Gold to start the year, prices have pulled back in a healthy way down to those converging moving averages. The red line represents the 200 day simple moving average and the blue line represents the 50 day. Also notice that on this pull back, momentum failed to reach any oversold conditions. This is generally a bullish characteristic.
Coming into April, Gold made new lows while breaching that 200 day moving average for a hot second before quickly recovering. This now gives us a nice pivot point to trade off. As long as prices are above this month’s lows, Gold is a long all day. Below that and things get messy. Risk management-wise, it’s an easy out where we know exactly where we’re wrong. For upside confirmation we want to see a close above 1320. That’s potentially a 5:1 or 6:1 reward/risk ratio depending on your entry point. We like that.
To get a price target we want to look at the weekly chart. As you can see here, a year ago Gold broke below very important support levels. After 3 successful tests of around 1525 or so, that demand dried up. Any attempt to rally back up there should run into new overhead supply. So that 1500 and change level gives us a nice clean target.
What I find supportive of this bullish thesis is the fact that on both the daily and the weekly chart, momentum was shifting higher on the second low of this double bottom. In addition, I still see a lot of pessimism on The Street in this particular market. I have a funny feeling that if Gold starts to approach our 1500 target, the optimism should start to pick up. We’ll be fading that optimism and moving on to another trade, possibly even shorting Gold. But we’ll cross that bridge when we get to it.
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Tags: $GC_F $GLD