Double Top Alludes to Lower Pricing in Gold

Paul Volker once said that “trees don’t grow to the sky, they never have, and they never will.” He said this in reference to the dynamic U.S. equities markets which were ascending to new highs while he was chairman of the Federal Reserve.

Simply put, even the most bullish markets tend to move higher in a cycle. Throughout this cycle, prices might take three steps higher at first, only to be followed by going one or two steps lower. Therefore, the fact that gold traded has to a high which is equal to last year’s highest trading price and then began to back off is no real surprise.

During the middle of December, gold prices concluded a multi-month correction from $1363 to $1238. These lows would mark the conclusion of the former correction and, more importantly, the beginning of a major rally. This rally took gold prices just above $1310 at first, before finding some resistance at the beginning of this new year.

Throughout the month of January, gold prices continued to move to higher ground until resistance was found at $1363, effectively creating a double top on a technical basis. Today we have gold under pressure, with February futures currently trading at $1340 per ounce, which is a decline of $12.10 on the day.

The fact that gold is retracing after a multi-month rally moved its price point roughly $120 higher is to be expected. However, the real question traders need to ponder is this: if gold is entering a corrective stage, where can we expect prices to find support?

Based on our Fibonacci-based technical studies, there are two key levels that traders should focus upon if, in fact, we have entered a corrective phase, and this correction will be shallow rather than deep. Today’s lows at $1336 come within two dollars of the 23% retracement of the recent rally. Below that is the 38% retracement which resides at $1302.

A deep retracement will typically result in a market giving back anywhere between 50 and 61.8% of the rally. If gold has entered a correction and that correction unfolds, a deeper selloff prices could go as low as $1300, which would be a 50% retracement, or to $1286 at the 61.8% retracement.

Since much of this most recent move has been predicated upon U.S. dollar weakness, it would be U.S. dollar strength that places underlying pressure on the precious metals. We would expect that trend to continue.

Wishing you as always, good trading,