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
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Switching to the weekly chart doesn't give us much reason for optimism that the breakout will be to the upside in the short run. In fact, the weakness of the past two weeks indicates that at least a test of trend support first around $1,285 to $1,290 is baked in. If that doesn't hold, then another support area around $1,265 to $1,275 would come into play. The trend would still be OK if either of those holds. But it's not OK if they don't.
Long-term trend momentum is mildly positive. But four-year cycle momentum is in a tough spot. It has been weakening since last September. It is nearing the level of the December 2016 low. A drop below that would be a bear market signal.
So here again we see just how critical a pullback to test the $1,280 area is.
Zooming in just a bit more, gold exhibits a 12-month cycle that usually contains two or three smaller waves lasting three to six months. The first of those shorter waves is normally the strongest. We saw that in December and January. But then it stalled. The next wave is due to begin in May or June. Gold bulls need to hope that the next upturn comes sooner rather than later and that the second wave is stronger than the first. That would be unusual. The second wave is usually no stronger than the first. Therefore, even if the $1,285 to $1,290 area or the $1,265 to $1,275 area holds on this pullback, that does not assure a subsequent breakout. The odds appear to be against it.
The worst-case scenario would be a clear breakdown of the $1,265 area, combined with a downturn in the four-year cycle momentum indicator. That would signal another cyclical bear market. In the event of such a signal, I'd expect to see gold fall back to at least the December 2016 low around $1,125.
So here's the bottom line. We simply do not know yet if gold will break down or break out. It depends on how it behaves over the next several weeks. A breakdown below $1,265 with a downturn in four-year cycle momentum would suggest a bear market. A breakout above $1,375 would suggest a new bull up-leg.
Long-term cycles appear to be out of sync. Gold should have been stronger coming off the 2017 expected four-year cycle low. That doesn't rule out a second wind for this up-phase, but it needs to happen soon.
The weekly chart setup is fraught with risk. That includes the short run, until clear evidence that the second sub-wave of the one-year cycle has turned up. Risk is elevated for the one-year cycle as a whole also. If the next sub-wave due to start in May or June fails to lead to a breakout, the second half of this year will probably be ugly.
I would never tell a gold investor to sell. But it is too soon to add. And for traders, it's too soon to buy. If the next one-year cycle sub wave fails to break out by mid-summer, gold could even be a good for a trade on the short side.
We'll cross that bridge when we come to it.
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The post This Month Could "Make or Break" The Gold Market appeared first on Lee Adler's Sure Money.
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.