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Platinum Price Breaks Out Against the Trend

Platinum Price Breaks Out Against the Trend

2014-02-12 19:51:00
Research, Research Team

As the price of platinum breaks out to the upside, the charts suggest the precious metal may be undergoing a longer-term reversal. Here's why…

Key Takeaways:

• Platinum has just broken out of its February range.

• Shorter-term charts suggest a downside correction may be due.

• Daily chart indicates a potential trend reversal

Since the beginning of February, the price of platinum has been trading within a relatively tight range between 1,370.0 and 1,390-1,392.0. Today's trading however, has seen platinum break this range to the upside. Will the bullish momentum carry the price of precious metal higher, or should traders look to the downside for potential targets? Here is what the charts say:

Platinum Price - 4 Hour Chart - XPT/USD

platinum-price-breaks-out-0011_body_Image31.jpg, Platinum Price Breaks Out Against the Trend

First, let's take a look at the breakout on the four hour chart. At the highlighted session, platinum prices broke through range support and closed at its high at 1,394.2. A close above range resistance is generally a validation of a breakout and, in turn, a buying signal. Traders took note of this close and buyers subsequently drove platinum prices up to a previously key level of 1,400-1,402.0.

Here, platinum prices have somewhat stalled. The first thing to note is that after a sharp upwards move, the price of an asset will generally experience a downside correction. Furthermore, the strength of the initial upside move generally dictates the size of the correction. While this is not always true, platinum traders should expect some sort of downside move following today's rise. Again, this does not always hold true but is regarded as the general rule. When the price of an asset breaks out of a medium-term range, it will often return to and retest the breakout level. This suggests that, in the short term at least, platinum prices may correct down to 1,392.0. The key level to watch will be 1,400.0. If platinum's price breaks below this key psychological level, expect a retest of the range breakout. Post-retest, if platinum can maintain its bullish momentum, prices could rise as far as in-term resistance at 1,421-1,425.0.

Platinum Price Hourly Chart - XPT/USD

platinum-price-breaks-out-0011_body_Image32.jpg, Platinum Price Breaks Out Against the Trend

Now take a look at the hourly chart in the same asset. A couple of factors on this chart lend credence to the aforementioned downside correction. The Bollinger bands illustrate the first. Bollinger bands generally comprise a 20-period moving average, along with two "banding" lines that are calculated as two standard deviations from the moving average. Traders use Bollinger bands on the assumption that price will revert to the central moving average line after reaching one of the outer bands. As you can see, price has traded at the upper band since the breakout, meaning a downside correction towards the central moving average is likely.

The commodity channel index (CCI) indicator illustrates the second noteworthy indicator. Traders use the CCI indicator to highlight levels at which an asset might be overbought or oversold. When the indicator reads above +100, this indicates an asset might be oversold and, in turn, die for a downside correction. The CCI indicator can remain overbought for a substantial amount of time, depending on the strength of the trend, so traders will generally wait until it crosses below the overbought level to sell. Platinum prices crossed below this level two hours prior to the writing of this piece, suggesting the correction may be upon us.

Platinum Price Daily Chart - XPT/USD

platinum-price-breaks-out-0011_body_Image33.jpg, Platinum Price Breaks Out Against the Trend

What about the long-term trend? Finally, take a quick look at the XPT/USD daily chart right above. The lower highs and lower lows (highlighted) suggest that platinum prices are still in a long-term downtrend. The downward sloping 200-day moving average supports this view. However, today's breakout might suggest a reversal point. The key level to watch will be the previous high (labelled "Key High") just short of 1,475.0. If platinum prices trade up top, and break this level, this could suggest the longer-term trend might be reversing.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.