We entered the most awaited period of the year when gold bugs could enjoy the traditional end of the year Santa Claus Rally. Let's check the charts to see if everything is setting up for a rally.
The DXY finally broke the valley of a consolidation. This gave the acceleration to the move down and buoyed the precious metals' prices significantly. Now, there are no other barriers ahead of the former valley area of 88. The DXY, aka "King," could dress up like a Santa, at least for gold. Please read till the end to see why I didn't mention silver.
The RSI has enough room for the index to dip lower. The move could be sharp enough to overcome the 88 mark and hit a lower valley of 87 as this current leg down started from a lower point of 103 this year while the former large move down kicked off from almost 104 in 2017.
Gold is in line with our plan as most of you voted that gold was about to reverse to the upside. Bingo! Indeed, the price has established a new low of $1765 on the day the previous post was published and then sharply bounced up to $1800.
The first trigger was pulled as the price broke above the mid-channel (red dashed). It is incredible how accurately the price goes with the blue zigzag I put on the chart to show you possible price action. The next move should be a sideways consolidation, which will give a good trading opportunity for those who believe that gold will rise further up. It should not break below the current growth point of $1765 to keep the structure intact.
I kept the long-established target price of $2152 on the chart but colored it in green because I used another technical indicator to locate the new target from another perspective.
This new instrument is called Andrew's Pitchfork or just a Pitchfork. You can understand the name of this indicator just by looking at the chart above. The median or center line (black dashed upward sloping) starts from March's valley, and it bisects the midpoint between the all-time high recorded in August and the most recent valley. The upside of the Pitchfork will act as a resistance, and the downside of it would offer support for the price.
The price is below the median line, and hence it will make a resistance as well. To find the new possible target for an expected move up, I measured the angle of the earlier move up that hit the all-time high (blue, 50 degrees) and projected it forward to locate the area where it would touch the centerline. The new target is a long way away at $2400. The price should travel the distance of $561 from last Friday's close. This could be a real Santa Claus gift for the gold bugs.
The price needs to break above the crucial level of 50 on RSI first and then crack the all-time high before we could see AB/CD and Pitchfork levels. Such a dramatic price change could be a result of a huge risk-off adjustment. Let us see what will happen next.
Silver seemed to guess my concerns about the uncompleted structure, and it pushed firmly to the downside to tag the valley of $21.67. It was close as the price hit $21.89, but then it reversed with gold to the upside.
I had to build an alternative scenario for the white metal to the deep regret of silver bugs as it left the structure undone. I changed the labeling compared to the previous chart. We have the first zigzag down (red), then the market has built a sideways consolidation (green) with the first leg up (i) and a minor retracement.
I consider the current upward move as a second minor leg up within a green structure. It could touch the $26 area where (ii) would travel the equal distance of (i). The structure of this move will be critical to consider the further scenario. If it resembles the move (i) structure, then the red leg 2 will emerge to extend the consolidation. The price could sink below $20 and touch the orange channel's downside between $17 and $18. After that, the major uptrend could resume.
How is it possible that top metals will diverge when silver reaches $26? I prepared the next chart of the gold-silver ratio below to address that question.
Look at the gold-silver ratio chart above, this kind of consolidation highlighted with the orange downward sloping channel that I expect to appear on the gold chart after the current move to the upside.
I think the ratio will take off soon as the structure looks extended, and the RSI confirms it as it is hovering around the crucial level. One should wait for the breakout of the 50 mark by RSI to get the bullish confirmation.
The ratio is in the newly established range between 69 ozs and 126 ozs. The risk-reward ratio at the current price position favors bulls, as the range's downside is very close. This scenario implies gold's growth against silver with a significant gain, resulting in the strong lag of silver behind gold. This could be the answer to the question about the divergence of top metals raised under the silver chart.
INO.com Contributor, Metals
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.