A Compression Triangle is Identified in Both Gold and the U.S. Dollar

For the third consecutive day, gold has gained value again. At the same time, the U.S. dollar has had three straight days of consistently lower pricing. The recent gains in gold, as well as the declines in the dollar, have run in tandem with the current risk-on environment that favors U.S. equities over other asset classes, such as fixed income and safe-haven.

Although it is not at the forefront of market sentiment, the looming trade dispute between the United States and China continues to pressure the dollar and be supportive of gold.

The uncertainty encompassing potential actions by the United States regarding Syria’s use of chemical weapons on its own citizens has been a critical component in the recent price advance of gold. Since Friday of last week, each consecutive day has had a higher low, a higher high, and a higher close than the previous day.

These three days have also contained a closing price above the opening price for the day. This creates three daily bullish candlesticks. However, the range between the daily opening price and the corresponding closing price has narrowed over the last two trading days. This indicates that although the market maintains a bullish demeanor, market sentiment is not entirely onboard and continues to have a ‘wait and see’ attitude.

Another explanation for the contraction of opening and closing price range is that recent gains have been in tandem with an extremely strong inclination to favor the risk-on asset class.

Based on our technical studies, gold pricing has much more room on the upside, and reciprocally the dollar has more room to fall. The dollar is currently trading down 20 points (-0.23%) at 89.33. Major support for the dollar does not occur until 88.58.

Recent lows in the dollar since January of this year have occurred at this price point. At the same time, the dollar has had a series of higher lows when trading to this critical support level and also had lower highs when trading at the upper level of the range which is creating a compression triangle.

Once current pricing reaches the apex of the compression triangle, there could be a significant release of energy causing pricing to spike in one direction or the other. Typically, when a market breaks at the apex of a compression triangle, price breaks in the prevalent trend direction. In the case of the dollar, that would undoubtedly be lower.

The same case can be made for a compression triangle in gold, which should break to the upside based on the most prevalent trend direction since the beginning of this year.

In other words, although recent price action has been solidly bullish for gold and solidly bearish for the dollar, once prices reach the apex of each triangle, we could see a dramatic fall in the U.S. dollar and a strong upside surge in gold prices.

Wishing you as always, good trading,