5 reasons gold hit most recent near-term bottom

October 10, 2014 05:23 AM

“Gold is a treasure, and he who possesses it does all he wishes to in this world, and succeeds in helping souls into paradise.” - Christopher Columbus 

Much like his historical reputation, Christopher Columbus’s effusive quote about gold has taken a hit over the past few years. The yellow metal has fallen nearly 40% from its 2011 high above $1,900 to trade below $1,200 at the start of this week, mirroring Columbus’s own fall from grace as more of his transgressions have been brought to light. In recognition of the upcoming Columbus Day “holiday” in the United States, we wanted to highlight why gold (COMEX:GCV14) may not be irreparably damaged.

Here are 5 reasons gold may have reached a near-term bottom at $1,180.   

1. Strong previous support at $1,180

The first and most obvious reason that gold may bounce from here is that it tested strong previous support at $1,180 earlier this week. This support level put a floor under the metal’s price in both June and December of 2013, leading to a 200-point rally in each case. While gold has been putting in a series of lower highs over the last few years, a bounce back toward at least $1,300 is possible off this key floor.


2. Bullish Gartley Pattern projects a rally off $1,180

In addition to representing a key level of previous support, the $1,180 level also marks the completion of a multi-month Bullish Gartley “222” pattern.For the uninitiated, this formation is named after the author (H.M. Gartley) and page number (222) of the first book to describe it (Profits in the Stock Market) way back in 1935. In essence, it helps traders identify higher-probability turning points in the market from the confluence of multiple Fibonacci levels.

In this case, the 100% retracement of XA, 161.8% Fibonacci extension of BC, and ABCD pattern (where the AB leg is the same length as the BC leg) all converge at $1,180 (see chart below). When multiple different support levels converge, the probability of a rally from that floor is increased.


3. Weekly bullish candlestick pattern

On a shorter-term basis, this week’s price action off the $1,180 level has been convincingly bullish. Gold prices are on track to complete a bullishPiercing Candle* formation this week, signaling a shift from selling to buying pressure and marking a possible bottom in the chart.

 *A Piercing Candle is formed when a candle trades below the previous candle's low, but buyers step in and push rates up to close in the upper half of the previous candle's range. It suggests a potential bullish trend reversal.


4. Slow stochastics turning higher from oversold territory

In addition to the bullish price action and converging support levels at $1,180, the Slow Stochastics indicator also shows that gold is oversold. As we go to press, the indicator is turning higher and about to cross back above both its signal line and the 20 level, suggesting that an oversold bounce is more likely. This mirrors the movement that we saw in the indicator the last two times gold tested $1,180 support.


5. Gold catching a bid on global risk aversion

Finally, gold is also catching a bid on global risk aversion. Fears about a global Ebola epidemic, falling global growth estimates, the end of quantitative easing and increasing geopolitical uncertainty are all contributing to the risk-off move, which has driven cash flows into gold, a traditional safe haven. If traders remain on edge over the next couple of weeks, gold should continue to enjoy a bullish tailwind from safe haven flows.

To the topside, bulls may look to target the Fibonacci retracements of the entire ABCD pattern in the coming weeks. The first hurdle could be the 38.2% Fibonacci retracement at $1,263, followed by the 61.8% Fib level near $1,310. Of course, if the bears are able to regain the upper hand next week, a drop through $1,180 support would herald another leg lower, in line with the longer-term downtrend.

Image credit: Eva Rinaldi


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About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.