Gold on the Verge of a Massive Breakout?

The S&P500 continued to bounce last week; it recorded a 0.5% increase by Friday’s close. While volatility didn’t change much for the entire week, it did creep higher on Friday. And volume was very light, strongly suggesting that this bounce was not the result of some massive money inflows or enthusiastic investor buying.

The technical picture resembles that of last week—bearish on the weeklies and bullish on the dailies. That said, the big pullback on Friday is now hinting that the bullish pattern on the daily charts may soon be ending. However, until it does, traders may continue to play the S&P more with a bullish stance rather than a bearish one. And our Simple Rule, especially with another week of gains, is still comfortably signalling a bullish position for longer term investors.

In US macro news the results were mixed. Retail sales, housing starts and the Philly Fed business outlook survey all registered results that beat expectations. On the downside, the Empire State manufacturing survey, the housing market index and initial jobless claims all disappointed. So once again, the US economy continues to muddle along.

In a subject matter that we bring up only a few times each year, gold continues to form a massive basing pattern. And by massive, we mean a formation that spans four to five years on the weekly charts. Specifically, gold is forming in inverted head-and-shoulders formation, a formation that is bullish. But what makes this long term formation more interesting is that it’s recently gotten the attention of some big-name and highly respected money managers. About a week ago, Jeffrey Gundlach from DoubleLine Capital, a multi-billion dollar money management firm, picked up on gold’s technical development. He not only supported the argument that gold is forming a huge basing pattern, but he went out on a limb and gave a rough forecast of gold’s upside price potential. Quite seriously, he said gold has about a $1,000 per ounce of upside breakout potential. And from our perspective, that forecast does indeed fit neatly with the inverted head-and-shoulders pattern that gold has already formed. While it would take some time to climb $1,000 it’s more than reasonable to see how such a move could happen.

 

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