The similarity in the patterns on the gold and silver charts means the silver price follows the behavior of the gold price. » Read More
Who stole the gold? The yellow metal's dramatic fall from $1,340 to below $1,260 is a break-and-enter theft on a grand scale.
It's going to take a while to find out who stole these profits from open long positions. But what's more important is to assess the extent of the damage and the potential for recovery.
Let's start with damage assessment. The fall below the historical resistance and support level near $1,290 is critical. It would be reasonable to expect that this level would provide support for any retracement but instead gold fell straight through this level. Chalk one up for the bears.
The uptrend with gold was well defined using a Guppy Multiple Moving Average (GMMA) indicator. The long-term GMMA was well separated and this generally shows strong buying support from investors. The upper edge of the long term GMMA was a little above the historical support level near $1,290. The fall below the upper edge of the long-term GMMA is not good. Chalk another one up for the bears.
The outlook for oil prices remains bullish, both on the chart and in the economy.
World economies still run on oil. The U.S. economy may run on domestic shale oil, but China remains dependent upon imported oil.
West Texas oil sets the benchmark. The outlook for oil remains bullish, the chart confirmed with the reaction rally from near $38 and the retest of historical resistance near $48.
Three features have helped confirm the bullish outlook on the chart: the Guppy Multiple Moving Average relationships, the confirmed chart pattern and the history of support and resistance trading bands.
The first feature is the GMMA relationships, which are showing a classic breakout pattern.
The GMMA pattern of trend breakout consists of three parts: First is a rally that tests the value of the lower edge of the long term GMMA. This happened in June of 2015. The second part is a breakout above the upper edge of the long term GMMA. This developed in June of this year. The third part is a retest of the support levels followed by a rebound.
The short-term GMMA briefly dipped below the value of the long term GMMA. However, the price rebounded rapidly from the historical support level near $38. This behaviour confirmed the classic GMMA trend breakout pattern.
The desktop computer revolution more than 30 years ago brought technical analysis and charting to the masses - the first charting packages were simple but they were a massive advance over what could be done by hand.
Over time, charting analysis programs have become both more sophisticated and easier to access. Charting has shifted from stand-alone programs to being integrated into many trade execution platforms and even the most basic of free online programs and brokerage-provided software include 30 to 50 technical indicators.
The result is that more people are dabbling in technical analysis without really understanding what is involved, because the pace of education has not kept up with the pace of change.
It's more than just not understanding how technical indicators are used, this very amateurish approach also includes the misplacement of trend lines, support and resistance levels. This is not helped by the popularity of some software that claims to automatically plot these lines.
These points are significant because moves above or below these levels are used as triggers for trade entries or exits. Getting the position correct is essential for trading success, and ignorance can be exceptionally dangerous and expensive in the financial markets.
A case in point is the line chart of the dollar index with a downtrend line. A respected TV financial commentator told viewers in Australia recently that the dollar index had broken out from the downtrend and the US dollar was poised to go higher.
Back in May, we set a downside target for the dollar/yen at 100. That target has been achieved despite the optimism from Prime Minister Shinzo Abe.
The way in which that target was achieved provides some guidance to what may develop next. There are two dominant chart features on the dollar/yen chart and they define the potential future price action.
The first feature is the powerful down sloping trend channel. From February 2016, the lower edge of the channel has provided a strong support feature. The upper edge of the channel provided a resistance level.
This pattern suggests that dollar/yen has a high probability of reacting away from resistance currently near 103 and retesting the lower edge of the trading channel, currently near 95. That's a particularly bearish outlook. It's theoretical and needs to be verified against previous price activity.
It's also important to note that a breakout above the upper edge of the trend channel signals a change in the direction of the trend. This change may include a consolidation sideways movement, or the beginning of a new trend. However, this is currently a lower probability outcome.
The Dow retreat was large, but not unexpected. The retreat presented a buying opportunity, but not for a long-term uptrend continuation.
Dow trend weakness remains significant. This is confirmed both with chart analysis, and with some fundamental analysis. The Dow chart now has three significant chart patterns and they combine to limit the Dow rally in the short-term and the strength of the longer-term uptrend.
The first and new feature is the uptrend line starting from February 2016. This is the first anchor point. The second anchor point is the July low. The third anchor point is this week's collapse. The slope of this new trend line is different from the slope of the long-term uptrend line that started in October 2011. The result is an ascending or rising wedge pattern.
A rising wedge is a bearish pattern that signals a high probability that prices will collapse and head in a downward direction. The trend lines of this pattern converge, with both trend lines slanted in an upward direction. The price movement is bounded by the two converging trend lines. As the price moves towards the apex of the pattern, momentum is weakening. A move below the lower support is a reversal in the upward trend.
This wedge pattern develops within the context of two other patterns that are also not bullish.
The second feature is the well-established trading band. The lower edge of the trading band is near 15,600. The upper edge is near 18,300. The width of the trading band is measured and then projected upwards. This gives a target near 21,000 for the Dow. This is a long-term target. The Dow is making new highs but there are technical chart features which limit the way the Dow moves to achieve the 21,000 target.
The gold price reached the long-term resistance target projection level of $1,360 before consolidating and retreating. The retreat offers a buying opportunity for an uptrend continuation back to $1,360 and higher. There are four technical features that suggest a bullish rebound.
The first feature is the strength of the underlying uptrend. This is shown with the Guppy Multiple Moving Average (GMMA) indicator. The long-term group of averages is consistently well separated. When prices dipped in June 2016, the long-term group did not develop any compression. This shows good investor support.
The current price dip has also not caused any compression in the long-term group of averages. This shows there is strong investor support for the trend. Investors are buyers when there is any price weakness.
The second feature is the recent minor support and resistance level near $1,290. This is not a strong resistance feature. It is important because it is also near to the upper level of the long-term GMMA. This provides two support features for any retreat in the gold price. This strong support provides a good base for a rally rebound and uptrend continuation.
The third feature is the behavior of the short-term group of averages. They are developing some compression but this is a slow retreat. The compression is not sharp and rapid so this suggests simple trading activity rather than signaling a change in the underlying trend. The compression behavior is similar to the temporary retreats in April and June.
The euro/yen chart has multiple features which suggest a downside target near 107. We show two of these features on this chart extract.
The dominant feature on the chart is the down-sloping trend channel. From July 2015 until June 2016, the lower edge of this trend channel acted as a support level. The line changed its polarity after the break below the lower trend line in June 2016. The line then acted as a resistance level.
On current values, this creates a resistance level near 115 for any rally. This limits the bullish behavior of the euro/yen. The strength of this downtrend line is a bearish feature.
Since June 2016, the euro/yen has been oscillating around the historical resistance level near 113. This has acted as a support level, although it has been seriously breached on several occasions. This suggests this level is a relatively weak support level. This second feature adds to the bearish outlook for the currency pair.
We normally focus on commodity, foreign exchange and Asia/US index charts but there are some chart patterns that are so compelling that they cannot be ignored. In many ways, this is an extension of last week's observations around the pattern seen in the oil chart. An opportunity can be found in every market, not just in the markets your look at regularly.
Germany's DAX shows two key charting features.The first is the long-term downtrend line. This starts with the peak near 12,390 in April 2015. The downtrend line is anchored with the highs in December 2015. The positioning of the line is confirmed with the peak and retreats in June 2016. It's a validly placed and effective trend line that defines the DAX downtrend.
It was broken in July 2016 with a clear move and close above the value of the downtrend line. The rally from this point has continued over the past four weeks. That in itself is a buy signal and bullish opportunity.
It is the second chart pattern that provides added interest and confirmation support for the breakout. This is the inverted head and shoulder pattern. The shoulders are shown as points A and C. The head is shown as point B. The neckline of the pattern is a segment of the downtrend line.
In June we were bullish on oil, setting an upside target near $58 based on the breakout above $48. The upsides target was not achieved. The trend breakout failed to develop and the oil price fell. Despite this short-term behavior, the long-term outlook for oil is bullish with medium term targets at $58.
There are three sets of features that confirm and define this bullish outlook. They are the Guppy Multiple Moving Average (GMMA) relationships; the emerging chart pattern; and the history of support and resistance trading bands.
The first feature is the GMMA relationships. The GMMA pattern of trend breakout consists of three parts. The first part is a rally that tests the value of the lower edge of the long-term GMMA. This happened in June 2015. The second part is a breakout above the upper edge of the long-term GMMA. This developed in June 2016. The third part is a retest of the support levels followed by a rebound.
The Dow breakout above 18,300 is significant, but it is also weak. This is confirmed both with chart analysis and with some fundamental analysis. The Dow chart has two significant chart patterns and they combine to limit the Dow rally in the short-term.
The first feature is the well-established trading band. The lower edge of the trading band is near 15,600. The upper edge is near 18,300. The width of the trading band is measured and then projected upwards. This gives a target near 21,000 for the Dow. This is a long-term target. The Dow is making new highs but there are technical chart features which limit the way the Dow moves to achieve the 21,000 target.
The second feature on the Dow chart is a long-term uptrend line. This uptrend line started in October 2011. To understand the significance of this trend line, we need to understand the way trend lines change polarity or function. Between October 2011 and August 2015, the uptrend line acted as a support level. The Dow would pull back to this level and then rebound and continue the uptrend.
In August 2015, the Dow moved below the uptrend line. Many people believe that when this happens it means a new downtrend starts. This is not correct. It means the nature of the trend has changed and with the Dow, it means the trend line changed polarity and now acts as a resistance line. When the Dow rallied in November 2015, the trend line acted as a resistance level. The trend line is projected into the future and it will continue to act as a resistance level.