5 Reasons Why The Gold Price Could Have Bottomed at $1,180

The yellow metal has fallen nearly 40% from its 2011 high above 1900 to trade below 1200 at the start of this week, mirroring Columbus’s own fall from grace as more of his transgressions have been brought to light. We want to highlight five reasons that gold may not be irreparably damaged:

1) Strong Previous Support at 1180

The first and most obvious reason that gold may bounce from here is that it tested strong previous support at 1180 earlier this week. This support level put a floor under the metal’s price in both June and December of 2013, leading to a 200 point rally in each case. While gold has been putting in a series of lower highs over the last few years, a bounce back toward at least 1300 is possible off this key floor.

2) Bullish Gartley Pattern Projects a Rally off 1180

In addition to representing a key level of previous support, the 1180 level also marks the completion of a multi-month Bullish Gartley “222” pattern. For the uninitiated, this formation is named after the author (H.M. Gartley) and page number (222) of the first book to describe it (Profits in the Stock Market) way back in 1935. In essence, it helps traders identify higher-probability turning points in the market from the confluence of multiple Fibonacci levels.

In this case, the 100% retracement of XA, 161.8% Fibonacci extension of BC, and ABCD pattern (where the AB leg is the same length as the BC leg) all converge at 1180 (see chart below). When multiple different support levels converge, the probability of a rally from that floor is increased.

3) Weekly Bullish Candlestick Pattern

On a shorter-term basis, this week’s price action off the 1180 level has been convincingly bullish. Gold prices are on track to complete a bullish Piercing Candle* formation this week, signaling a shift from selling to buying pressure and marking a possible bottom in the chart. A Piercing Candle is formed when a candle trades below the previous candle’s low, but buyers step in and push rates up to close in the upper half of the previous candle’s range. It suggests a potential bullish trend reversal.

4) Slow Stochastics Turning Higher from Oversold Territory

In addition to the bullish price action and converging support levels at 1180, the Slow Stochastics indicator also shows that gold is oversold. As we go to press, the indicator is turning higher and about to cross back above both its signal line and the 20 level, suggesting that an oversold bounce is more likely. This mirrors the movement that we saw in the indicator the last two times gold tested 1180 support.

5) Gold Catching a Bid on Global Risk Aversion

Finally, gold is also catching a bid on global risk aversion. Fears about a global Ebola epidemic, falling global growth estimates, the end of QE and increasing geopolitical uncertainty are all contributing to the risk-off move, which has driven cash flows into gold, a traditional safe haven. If traders remain on edge over the next couple of weeks, gold should continue to enjoy a bullish tailwind from safe haven flows.

To the topside, bulls may look to target the Fibonacci retracements of the entire ABCD pattern in the coming weeks. The first hurdle could be the 38.2% Fibonacci retracement at 1263, followed by the 61.8% Fib level near 1310. Of course, if the bears are able to regain the upper hand next week, a drop through 1180 support would herald another leg lower, in line with the longer-term downtrend.



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