On May 3rd I wrote that futher downside potential was very real in the gold and silver markets after key levels that I tried to warn readers about back on March 27th. On April 11th I warned that we should all be on the lookout for the “Death Cross” that was about to take shape in gold that was the signal to stay away from the long side. Gold was at $1,660.00 when I wrote that.
Sure enough, the bearish case played out as I thought it would and the death cross in gold did take form. As a result, we sit here with gold significantly lower than it was at the March high of $1,792.00. Gold, over $200.00 per ounce lower than it was just two months ago has some very bearish indicators working against it at the moment including no word about any further quantitative easing (although we know the FED stands at the ready to print more money) and a potential liquidity event about to grip most of Europe with far reaching global ripple effects. However, if you recall back in my March analysis, there was the potential brewing for a major technical inverse head and shoulder pattern in the longer timeframe of gold that, if it plays out, could vault gold to new all-time nominal highs. However, the probability of that pattern taking shape is getting slimmer as the days pass, and remains out of reach so long as gold continues to make a series of lower highs and lower lows. I suggest we take a look the chart.
As you can see, the death cross played out and gold slipped significantly further shortly thereafter.
The level I am watching with keen interest right now is the $1,535 level. If that level is breached on a closing basis, or if it falls significantly through that level, then the next potential stopping point for gold could be at the $1,300.00 level.
The inverse head and shoulder patter is still in play but is admittedly looking uglier and less proportional as each day passes. Although I feel it is unlikely to play out, gold cannot fall below $1,535 if we are to keep that pattern in play. We are potentially still in a right shoulder forming area right now, as we can essentially take any level between $1,535 or $1,604 to form a base for that right shoulder. Gold must stay flat or start to rise soon if we are going to put that pattern in play.
However, investors need to be very cognizant of the fact that the death cross usually implies that the trend has officially reversed indicating that further declines are very likely. Not until the 50 day cross back above the 200 day in what is known as the golden cross, will I be going heavily long.
Further concern lies in how far away gold is moving from the upper line of the descending channel implying that at the moment, the bears have the upper hand. The 50 day moving average should now be treated as resistance. A break through that resistance could be used to signal going long. The major concern is that there is no real support at the moment meaning that we could see precipitous drops in the price. With both the 50 and the 200 day averages significantly breached, the market will most likely focus on prior lows of $1,535 or $1,523 as areas of immediate strong support, or, as the market likes to do, pick round numbers like $1,550 or $1,575.00.
Of course, technical analysis is not a sure science but it has not failed gold trading since the double top was put in place. Fundamentals (news of additional easing or liquidity measures) will outweigh the technical picture so keep your eyes open.