Gold has had a nice bounce off the 1320 level due to robust demand for the actual metal, especially out of Asia. The problem for the metal here in the West is that speculators, most notably hedge funds, are eager sellers of the metal with many pressing it from the short side while others have yanked their money out of the metal to shove it into stocks so as not to miss the rocket blast higher and have to deal with unhappy clients.
I have been concerned that physical demand for the metal will wane as the price moves higher with those who are intent on acquiring the metal waiting, hoping, for a chance to buy it down below $1400 again. Whether they get the chance to do that remains unclear at this point.
I would like to note that the metal has now completed a sizeable bounce off that recent low but has run out of steam when it entered the $1475 - $1485 zone. In the process of so doing, it has carved out what is referred to in technical analysis jargon as a BEARISH PENNANT OR FLAG FORMATION. I have sketched the flag in heavy blue lines so that you can more readily see it. Normally this pattern forms after a steep drop in a stock or commodity which is followed by a mini uptrend. That uptrend then fails and the stock or commodity begins to move lower again.
Some TA analysts will use a break of the lower trend line formed on the actual flag portion of the pennant (think of a flag for a golf course hole and you will be able to visualize it better - In this case of a bearish flag it is an upside down golf course hole flag) - to validate the flag. That is an aggressive posture. I am much more conservative especially when you do get a recovery bounce of the nature and size that we saw occur in gold. I prefer to see the actual bottom of the flagstick taken out before confirming a flag. After all, a bounce off the recent low of some $160 is rather significant. Now, if gold had managed to claw its way back only to $1400 or so before failing, I would be a bit more aggressive but the size and extent of the buying down at that $1320- $1340 level was so strong that only the most aggressive of traders would want to call this flag validated merely because it drops through the lower trend line.
Generally how these formations are used, whether it is a bullish flag or bearish flag, is to measure the length of the flagstick. In this case, that flagstick starts up near $1590 and extends to $1320 for a measurement of $270.
If we use the case of the aggressive trader who decides that a break of the lower trend line (the pennant) has validated the flag, that $270 then gets subtracted from the breakout point, approximately $1470 in this case, to give us a downside target for the next leg lower. That would yield a gold price near $1200 as a final target.
As just stated, I do not recognize a valid pattern here until the bottom near $1320 were to give way. Gold may never reach that point or it may. I simply do not know. If it did, then I would consider the pattern validated if that level failed to hold and would have to look for a gold price of $1320 - $270 = $1050.
Let's just hope that we do not get a violation of $1320!
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