It seems that the press conference by Chairwoman Janet Yellen on Wednesday June 18th was not that benign after all. The equity market went to bed feeling good with S&P 500 closing at all time high. The currency market went into the night whiplashed. The gold traders went to bed mostly unconcerned but woke up with some extra emotions, which manifested in $40 change. What happened?
TV talking-heads gave many explanations ranging from fear of inflation, fear of rising rates, traders trying to protect their profits, traders positioning themselves for coming price rally, dollar index losing ground etc. No doubt, these reasons played a big part in gold’s surge on June 19th. But, chart patterns were also quite influential.
Gold peaked on September 6th, 2009 at 1923. It hobbled around for next 15 months traversing a descending triangle, a bearish pattern. In April 2013, it broke below 1523, the lower limit of the triangle. By the end of June 2013, it had almost reached the measured down target of the pattern by making a low of 1179 on June 28th 2013. Gold retested those lows in late December 2013 but did not breach.
Gold Making Failed Descending Triangle Patterns
The rally up from those lows did not reach the intermediate high between the two lows and it again started to make another descending triangle. Before today’s move up, gold was at the upper limit line of another descending triangle within the bigger triangle. The burst up that occurred at 7:00 AM, propelled gold futures to break above the upper line of the triangle. Now, it is testing the high of 1331 made on April 14th. The next resistance above it March 17th high of 1392.6. A descending triangle is a bearish chart pattern. A break above the upper line makes it a failed chart pattern. According to Thomas Bulkowski, the author of Encyclopedia of Chart Patterns, an up breakout of a descending triangle has the joint second best performance of all chart patterns.
GLD, SPDR Gold Shares ETF, made the high of 133.69 on March 14th. It is 5.3% above Thursday’s close and is a good target.
Silver Matching Gold Pattern By Pattern
Silver, the poor cousin of gold, is also making a similar chart pattern and so is SLV, iShares Silver Trust ETF. The two targets at resistance zones for SLV are approximately 6.5% and 19.5% away respectively.
Weakness In Dollar Helping Gold
It is quite natural that any weakness in dollar will show up strength in a dollar denominated gold futures. The FOMC Statement and press conference were not very bullish for dollar. Dollar index was vacillating before the FOMC meeting but after wards and it started to decline. The support level for dollar is May 8th low of 78.93. Thus the help from weakening dollar will not last too long for gold.
At times, gold acts as a hedge against inflation. The May ’14 CPI numbers were hotter than expected fueling the concerns for rising inflation. However, the Feds were not too alarmed. The 30-Year US Treasury Bond was down for the day but its posture is still bullish as it climbing hugging the uptrend line. The risk for yields rising do exist but the gold may not get much boost from that direction.
Many factors are acting on gold’s price action at the moment. Trying to ascertain which one of them is more dominant is not going to be useful but knowing that the short term direction is up would be for a nimble and decisive trader.