Gold – Double Bottom Forms on Dollar Weakness

Weakness in the dollar driven by a more dovish FOMC message on Wednesday is offering strong support to Gold today and based on what we’ve seen so far, it may well be a sign of things to come.

Gold has been in consolidation over the last couple of weeks. The flag that has formed on the back of this is typically a continuation pattern – and therefore bearish – but dollar sell-off over the last 24 hours may have raised serious questions about whether Gold can maintain this downturn.

US Dollar Index Chart. Source – Thomson Reuters Eikon

Already we’ve seen one attempt to break above the flag, which it briefly did before being dragged back inside. Only a close above would be enough to convince me that the trend has been reversed. This would preferably be on the daily chart but a close above on one of the lower time frames may offer clues on whether this will happen. Especially if the break if confirmed with a failed retest.

The pair failed to break above $1,204.20 which roughly coincides with June highs which may help explain why it ran into downside pressure. What’s interesting is the fact that momentum clearly supports the bulls – as per the MACD and stochastic on the 4-hour chart – so despite failing at this level, there are few signs that the bulls are losing control. Instead it points to a correction, even at an important resistance.

What’s more interesting is the fact that this is the second time the top of the flag has been tested. This means that what we have within the flat is an incomplete double bottom, with a neckline around $1,200. If we can see a close above this level, it could prompt a much larger move to the upside.

When a double bottom neckline is broken, it doesn’t only suggest a reversal has occurred, it also offers a possible price projection, based on the size of the formation. This is calculated by taking the size of the double bottom – in this case around $25 – and projected it above the neckline break. If this happens now, it would give a possible projection of around $1,226.50.

These things are not always precise and, as with all technical analysis, are better when combined with other significant technical levels. In this case, $1,224.36 is a prior resistance, as is $1,232.53. This area would strike me as potentially offering strong resistance, if it reaches it of course.

As mentioned earlier, the double bottom is only valid once a breakout completes it. Until then, it is still a bearish looking flag and if we fail to see a break above, suggesting bears have retaken control, we could see the bottom tested once again.

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