With all of the tea bag parties going on, I thought I would take a look at gold’s technical picture and see if it was tea time yet for gold.
Cup and handle patterns are one of the most bullish set ups for technical analysts and can signal an explosive move to the upside. As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for four days to four weeks… then it takes off.
I view technical analysis as just another tool in a trader’s arsenal and not the end-all indicator of future price movement. That being said, the chart for gold is very closely resembling a cup and handle pattern. It is admittedly concerning that the formation does not have more of a “U” shape bottom, but precious metals rarely trade so smoothly. I discount the importance of having a perfectly-shaped “U” bottom with gold as extreme volatility is inherent to this sector. The chart isn’t quite as sharp as a “V” shaped bottom, as the cup bounced up and down from August through December of 2008, providing ample time for the necessary consolidation phase.
We will now be looking for gold to bounce off strong support around $870 and make an advance for $925. It the price breaks $925, it is expected that gold will quickly continue above $1,000 and make new highs in short order. The third time should be a charm for the important $1,000 resistance to turn to support.
On the down side of things, if support at $870 does not hold, gold could easily fall back towards $800. At the moment, the GSB Portfolio is largely out of precious metal stocks and into cash and a few non-commodity positions. There is no point in having your money as risk until the current chart is resolved one way or another. I am willing to miss the first move up towards $925 as I believe it will be only a small part of the larger move to $1,200 and beyond.
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