Right now, you may be wondering whether it's time to buy some extra bullion.
I don't blame you.
As you know, I don't consider myself a gold bug, but I do track the metals weekly in my Wall Street Examiner Precious Metals Pro Trader. Those of you who are gold bugs (and I have deep respect for you) can use that information however you see fit.
I just tell you what the charts are telling me.
And right now, they're telling me that May is an absolutely critical month for gold.
Gold has traded in the same range for 47 of the last 52 months. It's easy to forget how gold used to move in sustained trends. Is it finally ready to make its move and start another sustained trend?
I'll tell you what you need to know about that in a minute, but first, let's take a look at the long-term and intermediate-term setups.
A couple of things stand out on the monthly chart. Gold has repeatedly attacked resistance in the $1,360 to $1,375 area over the past three years. At the same time, it has repeatedly fallen back to a couple of long-term trend lines originating from the 2001 low. One of those lines has now been slightly broken. The second line is now at $1,280.
Theoretically, a bigger move is likely when either that support trend line or the overhead resistance at $1,360 to $1,375 is broken. But there's a problem. The price of gold could also trade sideways and just trickle out the apex of the triangle that has formed on the right side of this pattern since 2016.
The bottom line is that the setup itself doesn't tell us much, other than that gold could go up, down, or sideways. Woohoo.
A reverse head-and-shoulders pattern has formed since 2013. That's a very long time for a reversal pattern to develop. Such a pattern can result in a lasting move higher. But again, the pattern itself is not predictive. Breaking out through the neckline at $1,375 would increase the odds of a big move up. But until it does that, anything can happen, including a decline to the next support area around $1,200 to $1,250 for starters. So that pattern doesn't help us much, either.
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But cycle analysis gives us an assist. I have indicated four-year cycle lows on this chart. The question mark shows where the last low was due. Was that it? The shape doesn't look right. And the momentum line is also out of sync. As we approach mid-2018, one year after the expected cycle low, momentum is weakening. This is when it should be strongest. Momentum has crossed below its smoother. That is at least a preliminary sell signal. If the momentum line breaks the trend line that I have drawn from the 2014 low, and the smoother rolls over, that would be a sell signal.
This makes May a critical month for gold.
For the uptrend to remain intact, gold may not need to break out, but it clearly needs to end the month above that trend line at $1,280. Otherwise it could be heading into another cyclical bear market. At the very least, I'd expect a correction to $1,200.
On the other hand, strength in May that ends with a breakout through $1,375 would be quite bullish. When a reversal pattern resolves to the upside, we measure the expected minimum potential of the move by calculating the number of points between the low and the top of the pattern, known as the neckline. The expected target would be that number of points above the neckline. In this case, such a move would measure to $1,680.
If gold ends the month between $1,280 and $1,375, that would be a no decision. We'd then have to wait at least another month for a clear signal.
The Next Several Weeks Will Tell Us Which Way Gold Will Break
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.