Since there are multiple reasons to believe that the precious metals sector is in a bigger decline, it seems that we should focus on the analogy to the 2014 and 2016 analogies.
As we wrote earlier, in the first case gold rallied about $65 in terms of intraday highs and about $50 in weekly closing prices. In the second case, it rallied by $80 or $50, using analogous measures. What does it tell us? It gives a hint that gold is likely to rally $50 - $80 from the bottom and that the lower part of this range is more likely.
But, before moving further, let’s consider how much we can trust the above technique, given that there are only two very similar cases. Based on our experience, it seems that we should use it as a general guideline only. In other words, it makes us think that the upswing is not a one-day event, but also that it’s not something that is about to trigger a $100+ rally. In other words, we plan to use it as a confirmation of other techniques rather than a tool for setting the profit-take levels for our current long trading positions.
Ok, so how high can gold rally then?
To $1,270 - $1,290. That’s the target price range that includes most of the nearby resistance levels: the October and November lows in terms of the closing prices, the rising red support lines that were recently broken, the declining dashed resistance line, and the 50-day moving average.
The interesting thing about the 50-day MA is that the last two times when the price of gold moved to it, it actually broke it insignificantly and then started another downswing. If the history is to rhyme, we’re likely to see gold temporarily above $1,280 and then another slide.
The volume during yesterday’s upswing was sizable, which confirms the bullish outlook. The price change that’s visible on the above chart is likely incorrect – gold ended the session without the reversal that the above chart shows (and at the moment of writing these words, gold is trading at $1,257).
Summing up, the medium-term outlook for the precious metals market didn’t change based on this and last week’s developments and it remains bearish, but the short-term outlook improved significantly. Gold is likely to rally for additional $15 - $35 or so, before turning south again. Silver, mining stocks and related leveraged ETFs are also likely to move higher.