Gartley Gently Guiding Gold to $1260 Garrison

With this week’s big bullish move in the US dollar, it’s not surprising to see commodities like oil and gold have taken a hit. In particular, gold traded down nearly 30 points over the first four days of the week before stabilizing around $1280 today. That said, a developing bullish pattern suggests that gold could find strong support if the selloff extends toward $1260 next week.

Since the start of June, gold has carved out the majority of a Bullish Gartley 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 convergence of multiple Fibonacci levels.

In this case, at least four significant levels all converge around $1260:

• The 78.6% Fibonacci retracement of the XA leg
• The 161.8% Fib extension of the BC leg
• An ABCD pattern (where the AB leg is the same length as the BC leg)
• Bullish trend line support off the late December low

As a further technical confirmation, traders may want to see if the RSI indicator reaches oversold territory, which would also augur for a bounce. Readers should note that the Gartley pattern does not necessarily suggest we will reach point D, only that strong support is more likely to emerge if prices drop to that zone.

Meanwhile, from a fundamental perspective, Janet Yellen’s Jackson Hole speech earlier today failed to plow any new ground. While that’s hardly surprising, some traders were hoping that her views may have shifted toward the growing hawkish minority of the Fed, as revealed in Wednesday's minutes. Her obstinate adherence to her prescribed script may take some of the luster of the US dollar next week, and in turn, lead to a relief rally in gold.

If we do see a bounce from the key $1260 support zone, the Gartley pattern suggests that rates could rally all the way back toward $1310, the 61.8% Fibonacci retracement of the whole ABCD pattern (not shown). Conversely, if the pattern fails and the yellow metal falls below $1250, it would indicate that the selling momentum remains strong and could open the door for a move down to the 7-month low at $1240 next.

Source: FOREX.com