The suspense in the precious metals markets continued to build last week, with gold futures setting the tone by completing a leg higher inside of a broad sideways trading pattern and then pulling back at key resistance. This price behavior has been the ongoing theme since the pullback from record highs as traders tread water awaiting clues for a directional trend to resume.
A continuation of the rally in world stock markets underpinned the gold rally as commodities across the board recovered recent losses. Gold bounced accordingly moving about $30 higher from the swing low of $1,650 per ounce. This low marks the bottom of a Descending Triangle chart pattern which has begun to develop inside of a larger trading range. The pattern should serve to further narrow the short term swings in the market, with the upper and lower boundaries gradually converging as it progresses.
Friday's soft close below the top of the Descending Triangle resistance at $1,675 per ounce projects a possible retracement for the week ahead. This would set a trajectory for the next leg down in the pattern, with the price ultimately moving lower to retest the lower trend line near $1,650 per ounce.
The longer term direction is likely to hinge on overall strength in the commodities sector, which in turn will be dominated by the ability for equities to sustain the recent strength. A resumption of the downward spiral in stocks continues to hold bearish implications for gold in the near term, even with the flight to hard assets remaining as a main focal point for worried investors.
The uncertainty is well reflected in this chart pattern, which leaves gold traders with clear reference points on determining the relative strength of the trend. A breakout above the Descending Triangle resistance could signal the end of the sideways range and another rally back above $1,700 per ounce. However, the pattern is still in the early stages of development and there is room for several more moves within its boundaries before a meaningful breakout occurs.
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