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Gold's picture perfect consolidation

[ERTguy]

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Gold's Picture Perfect Consolidation Pattern

3/3/2016

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First order of business: My apologies for the lack of posts recently.  I've been on a family vacation for the last week and a half.  Since this blog is only a hobby and I make exactly $0 doing it, I thought I'd take a brief hiatus from the markets.  In any event, I'm back and ready to go...

Reader Dave contacted me yesterday asking what my thoughts were on the "perfect pennant formation" shaping up in gold.  I think that's an excellent topic for today's post, so here we go!

Up first today is a daily chart of gold going back about 6 months.  From a technician's point of view, you couldn't ask for a better bullish setup.  First, we have the nice, smooth saucer-shaped bottom that began last October and peaked in mid February - a nice four month consolidation.  What's appealing about this pattern is that it not only has a smooth, orderly shape, but the volume ebbs and flows exactly how we'd want to see it.  Take a look at the trading pattern in the third week of December for example.  On December 17, Gold sold off hard, attempting to break below the lows from a couple weeks prior.  A breakdown failed to materialize and then volume fell off a cliff in the subsequent trading days.  I understand that was Christmas and New Years, but sellers had a golden opportunity (pun intended) to break this down and do some real damage.  From there, price started to rally into the new year on increasing volume.  The bullish pace only picked up from there and volume started to explode in February as price began to rise.  Now that gold has been consolidating those gains, volume again has started tapering off.  Again - exactly what we'd want to see on a bullish chart.

Aside from volume, this chart has several other positive aspects as well.  One example is the golden cross that just took place with the 50 dma crossing above the 200 dma.  This indicates a change in momentum from bearish to bullish.  Yet another bullish aspect of this chart is the more recent pennant consolidation pattern marked on the chart above.  After a huge rally like we saw in the first 6 weeks of 2016, it's no surprise that gold is taking a breather.  It's not unusual in patterns like this for price to correct up to 50% of the previous advance.  So the fact that gold has only corrected 5-6% from its mid-February highs speaks to the strength of this rally.  Any weakness is being bought.  In addition, the pennant formation is yet another bullish consolidation pattern for gold.  In other words, you have a textbook rounded saucer bottom followed by a near perfect pennant formation.  Again, this chart is just chock full of bullishness.  So what does this mean for the future of gold?
 

 

Pulling out to a weekly view, we can put these consolidation patterns in context.  The recent advance broke out of a multi-year downward channel as shown above.  Weekly MACD is looking really good as it too broke out of a long consolidation pattern.  Assuming all of these bullish chart indicators resolve to the upside, I'm seeing a price target of $1350-$1400 in the near term (3-5 months).  In order for this to happen, gold would have to close above $1265 on a weekly basis and, preferably, have some good volume behind it.  In the scheme of things, expecting a $100 advance from current levels isn't too crazy - we're talking about an 8-10% move.  I think that's realistic given the chart specifics I pointed out above as well as the global macroeconomic backdrop.  If an when gold makes its next advance, I'll take a look at a longer-term chart and see what we can expect.  For now, bulls need to take this day-by-day

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