Gold, silver and oil have been rallying in July, but the overall outlook does not appear so rosy. The rally has pushed prices into descending channel resistance levels, which have sent prices lower in the past. With all three of these markets making some good-sized swings in 2017, traders will be watching to see if these commodities can break to the upside or if the pattern will result in prices sinking once again.
The United States Oil Fund (USO) has been in a very well-defined descending channel going back to March. The top of the channel can be drawn across the last three price peaks, and each time the price has reached that level, a lower low (move to bottom of channel) has followed. On July 26, the price reached the top of the channel once again. The trendline should not be used as a trade signal – instead, traders will be watching for signs of a reversal near the trendline. These could include a strong bearish engulfing pattern or a consolidation followed by a downside breakout. If those develop, the target is the bottom of the channel, currently at $8.30. (See also: Why Oil Prices Are Headed Even Lower.)
Even if the price rallies above the trendline, that isn't a major concern at this point. As long as the rally stays below the prior peak (May) of $10.70, the downtrend remains in effect. Only if the price rallies above $10.70 would that indicate a possible reversal, at which point the bias would shift to the upside, making the next pullback a buying opportunity.
The iShares Silver Trust (SLV) made a significant lower swing low in May (relative to March), which kick started a descending channel. The estimated resistance area based on the descending trendline is $16. Traders should watch for a reversal signal near $16 – if the signal occurs slightly above or below the trendline, that is fine. Signals include a bearish engulfing pattern or consolidation followed by a downside breakout. If the swing lower develops, the target is $14.30 (currently the bottom of the channel). (For more, see: One Way Investors Are Betting on Silver.)
The downtrend remains intact as long as the price stays below the previous swing high (June) of $16.80. If the price rallies above that, the outlook becomes more bullish, making the next pullback a likely buying opportunity.
The SPDR Gold Trust (GLD) made a major lower swing low in July (relative to May) but has not yet made a confirmed lower high. The lower low indicates that gold has entered a potential downtrend, meaning the price is unlikely to rally above the prior peak (June) of $123.31 before dropping. An estimated resistance area is $121 to $122. Since silver is in a defined channel, if silver starts heading lower at its resistance, then it is also likely the time to sell gold. If gold starts heading lower, the target is $114 (trendline along the previous two swing lows). (See also: Gold Has Broken Down: Here's What Comes Next.)
A rally above the June high would shift the bias back into the bulls' hands, making the next pullback a buying opportunity.
The Bottom Line
Gold, silver and oil are heading into a technical resistance area. The descending channels – which are present in USO and SLV, and could be forming in GLD – indicate that prices could be heading into another swing to the downside. As it stands, the edge favors the bears for a price decline toward the channel bottom. However, if the prices rally aggressively above prior highs, that would shift the edge back into the bulls' hands, making the next pullback a buying opportunity. (For additional reading, check out: 3 Chart That Suggest Bears Are Taking Aim at Commodities.)
Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in these ETFs and will not be initiating positions (in the ETFs or futures contracts) for at least 48 hours.