Gold, like all markets, displays repetitive patterns in its price history.
We present two patterns, one from 2000 and another from 2013.
If these patterns continue to replicate, then gold should drop into the $1,225-$1,250 area before bouncing.
We present patterns in the price history of the gold market that seem to be replicating in real time. If these similar patterns continue to replicate, then gold will continue to fall, but is unlikely to fall below $1,225 before bouncing higher.
Gold has a strong inverse-correlation with the dollar. There's a pattern forming that's similar to the trading in 2000 - both then and now, the dollar was in a trading range and gold was trading within a pennant formation (chart below).
In 1999, as the dollar broke out of its trading range, gold dropped out of its pennant formation. If the IMF had not restricted its gold sales, gold would have likely fallen to much lower prices (chart below).
This time around, the IMF is unlikely to interfere in the market like it did in 1999, which means that when gold drops out of the pennant formation, it could be a seriously deep dive. However, the pattern similarity implies that gold is likely to "ping pong" inside the pennant formation before falling out of it (chart below).
Gold also is replicating a pattern from 2013 that started with breach of the short-term trendline and the 20-week MA crossing over the 200-week MA. The purple highlighted areas on the chart below show the similar patterns of the RSI, MACD, Stochastic, and ADX. If the pattern continues to replicate, then we expect gold to drop to the $1,225-$1,250 zone before bouncing higher (chart below).
Gold's technical situation has deteriorated at this point:
- The RSI has accelerated its fall from overbought levels
- The MACD has made a bear cross-over and followed through
- The stochastic has dropped away from over-bought
- The -DI has crossed above the +DI
Gold bounced off the 62% Fibonacci retrace of last year's April to August decline, but was turned back at the $1,350 level, crashing through the sort-term trend-line, the 50-day MA, the $1,300 psychological level, and the 62% Fib retrade level. The next support is in the $1,270-$1,280 zone which includes the 50% Fib retrace level. After that, there's resistance at $1,245 which is the 38% Fib retrace and which is within the $1225-$1250 zone mentioned above (chart below).
In conclusion, we think gold will continue to drop until the $1,225-$1,250 price zone before it rallies to test the short-term trendline and the upper boundary of the longer-term pennant formation.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.