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Chart: Gold could be set for a strong breakout

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The British voters’ decision to leave the EU has badly shaken markets– although the dollar remained relatively calm while investors rushed into the safety of gold. Gold prices reached the long-term resistance target projection level of $1,340 before retreating. This is a rally within the context of a longer-term uptrend breakout.

Technically, this breakout is strong and there is a strong probability gold will move above $1,340 and move towards resistance near $1,580. However, there are important changes in the structure of the gold market that make the move above $1,350 and towards $1,580 more hazardous and volatile.

U.S.-listed gold exchange traded funds (ETFs) now own massive amounts of physical gold. Only seven sovereign nations own more physical gold than the U.S. gold ETFs. Add to this the physical gold held by gold ETFs listed in the UK, Australia and Europe and we can see a significant shift in the way physical gold is held and traded.

This structural change in the market means gold demand is now also closely linked to brokerage account margin calls as ETFs are a derivative trading instrument. Such high exposure to margin calls is a great concern during periods of high market volatility. It means that the gold price may react much more quickly in either direction than the fundamentals might suggest. It means that price targets are reached more quickly, and that retreats are more sudden and severe.

The first most important feature on the weekly gold chart is the breakout from the fan trend line pattern. The four downtrend lines have a common starting point from the high in October 2012. These are not Fibonacci fan lines. This pattern gives early warning of a substantial and sustainable trend change and this pattern often ends with a very fast and strong breakout.

The second feature is the continuation of the breakout as confirmed by the Guppy Multiple Moving Average (GMMA) relationships. The long term group compressed, turned upwards and has now separated which shows increasing investor support for the new uptrend. This pattern encourages traders to buy when the market retreats and then rebounds from the upper edge of the long-term GMMA.

The first upside target for gold at the historical resistance level near $1,340 has been achieved with a rally spike. This trend volatility will stabilize and the steady uptrend retest of resistance near $1.340 will continue. The new uptrend in gold offers better entry opportunities as the price retreats and rebounds.

We used the ANTSSYS method to trade this breakout and its continuation towards $1,580. The increased separation in the long-term GMMA confirms the strength of the uptrend.

One thought on “Chart: Gold could be set for a strong breakout”

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