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December 14, 2024

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Gold technical analysis: Is gold about to capitulate?

Gold technical analysis: Is gold about to capitulate?

The next few weeks are bound to have gold bulls on edge! When we zoom out to the weekly timeframe, it really becomes make or break for gold. We are at a MAJOR support level which must hold for gold to continue higher. Otherwise, everyone’s favorite yellow shiny precious metal will have more downside to come.

Let’s not forget that gold is testing this major technical zone just as the markets are anticipating two major fundamental events. I am of course referring to the Federal Reserve Interest Rate decision and US Q2 GDP. The former is expected to see US rates rise by 75 basis points but markets really want to hear how hawkish Jerome Powell comes off. The latter could see the US officially enter a recession depending on the data.

When you have applied technical analysis to markets for as long as I have, it comes to no surprise when markets find themselves at important support or resistance levels just as major fundamental events are around the corner. For traders, a time period like this is great for sniper trading. Set ups pause, form and then trigger, allowing us to join in on the next rally. You just need to ensure you shoot in the right direction!

TradingView Chart

Above is the chart of gold on the weekly timeframe. Each one of these green or red candles represents an entire week (Monday-Friday) of price action. If you look to the very right, you will see that gold has had some rough weeks.

The breakdown below $1800 was a big technical event which took us down to $1680. Notice my major blue line here. This is the line in the sand. This is the major support gold must hold.

Support is simply the technical analysis term for price floor. We tend to see sellers take profit here and expect to see buyers step in here. Typical trading strategy usually dictates “buy support”, although it isn’t as simple as that. Supports are important inflection points which see a lot of trading and for us bulls, we hope to see a platform developing for the next lift off higher.

So what is the take away? $1680 is very important, and gold must hold above if it wants to begin a new rally higher. A weekly close below $1680 would be bearish. A breakdown would take us down to $1500… and damage plenty of gold bug egos. What could cause such a thing? Well a hawkish Federal Reserve. If the US Dollar strengthens post Fed, it could be enough to cause a breakdown in gold. Things get tricky though with a potential US recession.

If we were just to apply technicals without any fundamentals, gold looks worrying from a market structure perspective.

Stan Weinstein came up with this market phase strategy which I apply heavily to my trading and investing:

Stan Weinstein Stage Analysis (Stan Weinstein Trade With Trend!) | Stan Weinstein Trading - YouTube

He uses stage 1, stage 2, stage 3 and stage 4 but we can call them range, uptrend, range, downtrend.

Compare his stage analysis to the weekly chart of gold. Yes that’s right, his analysis lines up very nicely and gold appears to be in its stage 3 form. If we were to apply market structure, then it is safe to assume that a downtrend (stage 4) comes next.

But wait. There’s some hope.

IF the US enters a recession, central banks will be forced to begin cutting rates in order to spur the economy. The markets seems to be pricing a recession:

TradingView Chart

Above is the daily chart of the US 10 year bond yield. Very important in determining where interest rates could be heading. After a large rise in yields, we seem to be reversing. I won’t bore you with more technical patterns, but suffice to say that a major reversal pattern will trigger if we go below 2.70%.

What does this chart tell me? The implication is the market is calling the top of interest rates, forecasting a recession. Since central banks tend to cut interest rates in a recession, it is best to buy bonds yielding whatever they are now because they will be worth more than the bonds issued at a later date when central banks cut rates and bonds yield less.

The other thinking is there is a move into risk off assets. Money runs into the safety of bonds because of fear. But we tend to see the US Dollar rise at the same time when we have a risk off environment. I do not see that at the time of writing.

So what does this all mean for gold?

Besides the fact that central banks cutting rates when inflation continues to come in higher, even with a recession, might trigger a confidence crisis, which would be great for gold, there is another mainstream financial reason. Gold tends to do poorly in an environment when interest rates are rising. When rates are low gold tends to shine. This is because gold does not yield anything unlike bonds. When bond yields are low, gold looks more attractive.

So if we see the 10 year yield drop, this would be positive for gold. It could just be the trigger for gold to bounce at this major weekly support zone.

TradingView Chart

How am I playing gold? Well for the long term, this article explains the BEST way to invest in gold. As a trade, I am waiting for one trigger signal.

Just because we are at a major support doesn’t mean a trader should buy blindly. I want to see a trigger which increases the probability of a bounce at support. For this, we need to drop down to the daily chart which I have provided above.

First of all, notice how we got a very large green candle at $1680. This is evidence of how important this support level is. We know buyers are stepping in.

I would like to see a base develop here. A range indicating selling pressure is exhausting. Actually do me a favor. Scroll up and take a look at the Stan Weinstein stage analysis image. If we were to apply that on the daily chart, where would we be?

If you said stage 1 you would be correct! Now all that is required for a new uptrend/stage 2 is a breakout trigger. A break and close above $1737 is what I am watching for. Let’s make it $1740 to have a nicer number. If we get a green close above this, then a move back to $1800 is in the cards. A breakout would begin a new uptrend which would remain valid as long as we hold above $1740 going forward.

There you have it, a big week for gold and gold bulls. The same applies for silver, but I will do a whole new analysis for that. Major support zone is being tested and we have two major fundamental catalysts coming! I suspect the price of gold will range here until the Fed on Wednesday. Volatility in all markets post Fed will determine whether gold makes or breaks at this major support.

Happy trading.

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