Hawaii Six O - Gary Wagner
Multiple indications of a reversal in gold and silver
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Both gold and silver had been trading under extreme pressure, resulting in dramatic price declines in both precious metals. In fact, gold traded to an intraday low on Tuesday of just below $1680. Gold prices have been under pressure for quite some time as a multitude of factors have been directly responsible for the lower pricing. Rising yields on 10-year U.S. Treasury notes, a strong dollar in the United States, U.S. indices reaching all-time record highs on multiple occasions have directly attributed to the price decline witness in gold.
While most analysts acknowledge that both gold and silver prices are in an oversold condition, up until yesterday, we did not see any signs of a potential recovery. That is not the case currently. Yesterday we were able to identify not only Japanese candlestick patterns but other technical indicators as well, which are in confluence with the bullish reversal patterns.
Chart 1(a daily candlestick chart of gold futures), which goes back to the lows achieved in March 2020. This chart contains one major Fibonacci retracement sequence, which begins at the lows of March 2020 when gold was trading at $1450 up until the record high of August when gold prices reached $2088 per ounce. On closer inspection, we can see that on multiple occasions, each time gold prices sold under pressure and reached approximately $1680. At this critical level we saw solid support come in leading to a key reversal in gold pricing.
The first example occurs between April and June 2020 when on five different occasions, market forces took gold pricing to around $1680. Four consecutive bottoms were hit during those months. With the first three occurrences gold was able to reverse and trade higher, then stall at around $1750 before retracing back to the bottom at $1680. On the fourth bottom during that multi-month period gold reversed as well; however, on this occasion it marked the beginning of a rally which would conclude at the all-time high of $2088 per ounce in August. From August up until the last few days gold has had a slow and methodical multi-month correction taking it to the last two occasions when gold hit the lows at $1680.
At the beginning of March 2021 gold prices once again hit that price point. In the first instance we did see a key reversal of gold which once again stalled at approximately $1740. From there gold formed a rounded top until it once again reached $1680 on Tuesday of this week.
Yesterday’s action created a variation off a two-candle key reversal pattern called an engulfing bullish. The reason I am labeling it a variation is that this pattern in its truest form will have the second candle open below the real body of the first and close above it. In the most current instance yesterday’s candle opened slightly above the prior close, thereby creating a variation of this pattern.
Engulfing bullish patterns require defined criteria to contain valid tradeable information. The first requirement is that this pattern must occur after a defined downtrend, a criteria gold certainly meets. Following the identification of the two-candlestick pattern, there must be a third candlestick which confirms the engulfing bullish. This candle is composed of a green candle (meaning it closed above its opening price) containing a higher high, and a higher low, as well as a higher close than the prior green candle. That is what occurred in today’s trading activity with gold futures up approximately $13. If there is an effective close above this price point it could be signaling a key reversal indicating that the selling pressure has abated and that the bullish faction is once again regaining control.
Just as in gold, silver formed a simple key reversal pattern called a piercing line. A piercing line begins after the market has been in a defined downtrend, a criteria silver also meets. The first candle in the pattern trades to a lower low than the previous low and is a large red candle is seen in chart 3. It is followed by a green candle which opens below the close of the prior red candle and then closes at or above the midpoint of the red candle. This candle also requires a confirming candle on a closing basis to be considered a strong and valid signal. That is exactly what occurred with silver continuing to gain value after yesterday’s strong gains.
The fact that both gold and silver hit intraday lows that put those metals in a technically oversold scenario, coupled with the fact that they occurred at key support levels, and finally were followed by confirming candles in both cases suggests that we could see both precious metals rally from this point. For that reason, that we believe it likely that what we are witnessing is the end of this most recent leg of the correction and the beginning of a rally. Whether it is a longer-term move, or just a short reversal that keeps both metals in a defined trading range is yet to be determined.
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Wishing you, as always, good trading and good health,