Chart Of The Day: Is Gold Finally Bottoming?

Though the S&P 500 yesterday scored its 69th record close for 2021, goldbugs might be more interested in a far less publicized event: gold has reached its highest level in five-and-a-half weeks.

Given that the Fed recently turned hawkish, the precious metal's rise is probably not the result of any dollar weakness. Indeed, the USD is within 1% of its 18-month high, which should be pressuring the yellow metal, not boosting it.

However the rapid spread of COVID's Omicron variant is likely causing investors to continue holding and acquiring safe haven assets, even as equities feed any remaining risk appetite. Gold, of course, is a classic haven. 

As well, gold's gains may be supported by its status as an inflation hedge, though we'd expect the yellow metal to lose some of its luster on that score as the Fed continues tightening fiscal policy, offsetting the need for any protection against inflation. But then inflation may soon be easing as well. This morning, Japan's November Industrial Production release came in at a record high level after carmakers were finally able to obtain long-awaited components as the supply chain snarl finally moderated, which could take the pressure of price increases and availability.

All of which looks good for gold fundamentals over the longer term—if it doesn't accelerate as the dollar loses buying power, it could still rise as a safe haven. From a technical perspective, it appears that demand will push the yellow metal higher.

Gold Daily

Gold may have completed a rounding bottom. The trickiness of this pattern is in knowing when it's complete.

Experienced traders would rely on the 200 DMA as a natural neckline, since the major MA turned to support after it was broken through. However, novice traders might wait for a close above the Nov. 26 high of $1,819.30, to call the pattern complete. That's exactly where the price is sitting at time of writing. Both the RSI and MACD are signaling a higher trajectory.

The rounding bottom's implied target would put the price of gold on course for another technical milestone.

Gold Weekly 2019-2021

The short-term bottom could push the price up to its falling trendline since August. This trendline represents sellers.

What's tricky to gauge is buyer interest. Should we track flat support since the rising gap on Apr. 6? Or has the current mood among buyers been increasing since Mar. 8?

The underlying difference here is that flat buyer interest versus escalating seller interest is bearish, whereas rising buyer interest to meet the rising seller interest is neutral. However, given that the preceding trend was rising, there is an expectation that a symmetrical triangle will break in the original direction of the preceding trend, rendering it bullish.

This uncertainty on the chart projects the lack of conviction in the real world, since gold traders are unsure how to proceed in the current environment.

The good news, however, is that an upside breakout will render the move bullish, whatever pattern it is. Alternatively, the price could bounce off the ceiling of the pattern and head back toward the bottom of the pattern, which could then turn out to be bearish.

Therefore, this should be a monitored trade broken down into bite-sized entries. First, pay attention to the daily rounding bottom; then traders could deal with the top of the long-term pattern, according to their risk tolerance and budget. As such, we've provided two potential approaches below.

Trading Strategies - Long Position Setup

Conservative traders should wait for the price to close above the highest price traded within the pattern, $1,819.30.

Moderate traders would wait for the price to retest the 200 DMA.

Aggressive traders could enter a contrarian trade, shorting the session high, which is finding resistance by the Nov. 26 intraday high, with a close stop-loss, before joining moderate traders when the price returns toward the 200 DMA. Money management is key. Here's an example:

Trade Sample – Contrarian Short Position

• Entry: $1,819.30
• Stop-Loss: $1,820.00
• Risk: $0.70
• Target: $1,812.30
• Reward: $7
• Risk-Reward Ratio: 1:10