A double bottom developing on gold charts suggests a possible rally for the precious metal which is underpinned by major support near its three-year low at $1,180 an ounce, analysts said on Friday.
The formation, which has two troughs at about the same level, is particularly reliable for chartists because it reflects investors’ psychology by pinpointing the critical level where heavy selling has exhausted twice.
The pattern, which resembles the letter “W”, connects the two lows on June 28 and Dec. 31 both near $1,180, with a peak in the middle at $1,433 an ounce on Aug. 28.
“It suggests that gold has bottomed in the near term and can trigger new buying,” said Adam Sarhan, chief executive officer at New York-based Sarhan Capital.
To complete the bullish pattern, the metal must first rise above major technical resistance including a 2014 high near $1,280 an ounce and its 200-day moving average at $1,312, Sarhan said.
On Friday, spot gold was down 0.2 percent at around $1,240 an ounce. Prior to this week’s 2 percent fall, gold had posted a five-week winning streak after it posted a 28 percent drop in 2013.
“The uptrend since late 2013 is on thin ice, and we think if we don’t see a quick snapback, more testing could be in store,” said Mark Arbeter, chief technical strategist at S&P Capital IQ in New York.
Arbeter said a break above $1,267.50 an ounce will complete a bullish inverse head-and-shoulder pattern that could trigger a potential $100 rally.
Head and shoulders – which consist of a major rally and two smaller rallies which form the head and the shoulders – are also considered one of the most reliable reversal patterns by analysts.
In the near term, gold could be in a consolidation within a longer downtrend to digest last year’s sharp pullback, Sarhan said.
Should gold fall below its three-year low at $1,180 an ounce, Sarhan said he expects another major sell-off that will likely prompt big fund and institutional investors to turn completely bearish. (Editing by James Dalgleish)