Is Gold Breaking Out?

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By Jason McIntosh | Published 7 April 2022

Has gold bottomed and is gold breaking out?

Well, I can tell you that the gold chart is looking really interesting. So here’s a chart for gold… let’s talk through it because this is a classic chart setup.

[Click here for interactive analysis of the chart]

This is one of the most exciting charts I’ve seen for gold in a long time. What we have is one of the best asymmetric risk-reward profiles which you really get to see on a chart. Now, that doesn’t mean that it’s going to be profitable, and it’s going to work, and it’s going to go up. It just means that the risk-reward is highly favourable, and when they work, they can work really well. When they don’t work, they don’t do too much damage. That’s the idea.

So let’s set the scene. We had the breakout from a 12-month trading range about 6 weeks ago. And this was significant because this was the first time gold has had really good upside momentum since mid-2020, as gold was finishing the previous bull market. The second key event we’ve just had is a double top on the charts. We’ve got the double top there, and many people think a double top must be bad, but, it all depends what happens below the top. Sometimes these turn into large topping patterns, and they just meander around and then slowly start to roll over and then go into a long bear market decline. That can happen from a double top.

Another possibility, and we looked at this with the ASX 200 earlier, and this is what I think could be happening with gold. Another possibility is that the market stabilizes around here, builds some support, then starts to move higher, regains momentum, and then punch through to the upside. Should it do that, then we could really see some strong upside momentum in gold over the next one or two years. It really is one of those key pivot points, but it’s so crucial that gold holds its footing here and doesn’t start to fall back into its old range, because if that happens it puts the bullish case on hold.

The bearish alternate is that gold breaks down. But this is what risk management is all about. We can put levels in place where we’re exiting well before the bad stuff happens. Let’s work through this a bit more. Another good thing to do is to put the Fibonacci retracement levels on the chart. So let’s use the recent low, so this was a January low, and the recent high, and you can see that just this week gold’s come back to the 61.8% retracement, which is a textbook move. We’ve had the strong move up, we’ve had the return move, it’s pulled up in the Fib pocket, we’re bounced off there.

Another thing we can do is put our moving averages on, and you can see it’s also come back to the 50-day moving average and is the 100-day moving averages coming up below there. I think for the near term at least it’s make-or-break time for gold. We have all the reasons for buy the dip to happen here. There is the Fib zone… the moving averages. This is where traders who want to buy the dip need to show up and buy the dip, support gold, and then let that upward momentum re-engage and kick it higher. That’s the bull case for gold, and I think it’s an exciting one because from a risk-reward perspective, if you wanted to aggressively play gold, you could put a stop loss just below this week’s low. And that’s only about 2.5% below the current price.

My preference if I were going to buy gold here, and I’ve already got plenty of gold, probably don’t want any more just at the moment, I’d probably go for a 5% stop which would take it back into the old range. And if that happens, a bullish phase could be months away. But, for now, we’ve got the break. I think we’ve got to give the bulls the benefit of the doubt, and we’ve got to play it from the upside. My biggest concern is this was a catalyst-led rally, all about war in Ukraine.

And the problem with catalyst-driven rallies is they can sometimes quickly lose steam and then just collapse back in on them themselves. So this is why I say gold can’t lose its footing here. If it loses its footing here, it does open up downside possibilities. But that’s not the case at the moment. Gold is so far holding firm. Let’s see if it can continue doing that, let’s see if it can kick higher, and we could be getting close to gold’s day in the sun. It’s been an 18-month correction or consolidation to sit through, but it could be time.

So let’s leave it there for today. Hopefully, you enjoyed that. Hopefully, you got some good value. Look forward to coming back and joining you again next week. Thanks for tuning in. Until later. See you then.

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Meet Jason

I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney. 
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.