Gold Price Analysis by Daryl Guppy: Downward Pressure

The general rule in trading and technical analysis is to keep it simple. The more complicated a chart, the greater the room for error and excuses for not taking appropriate action. The usual chart display for COMEX Gold shows exceptional volatility and a web of four trend lines.

The central trend line starts form the low in July 2005. Gold price activity is defined by a parallel upper and lower trend line. Then we can add a new trend line to take into account the recent lows. Add a support line near $780 and another long term support line near $690 and it becomes a confusing chart display.

The candlestick chart contains two essential pieces of information for analysis. The first is the increase in volatility. Weekly price ranges have increased significantly and this signals indecision. The second is the broadening fan pattern. This is a long term signal of trend reversal. The bullish application of this pattern is seen in the Shanghai Index. The gold chart shows the bearish application of the pattern.



Shifting to indicator analysis using a GMMA display develops a clearer picture of the trend behaviour. The red group of moving averages gives the implied activity of investors. This group has turned down and begun to develop compression . This suggests long term investors are becoming sellers. They use the rise in price as an opportunity to lock in profits.

The group of blue averages indicates the behaviour of traders. There are three important features. First, this group has dropped below the long term GMMA for the first time since December 2003. This signals a very significant change in relationships from bullish to substantial bearish pressure.

Second, the rally rebounds driven by traders have become weaker. This is verified on the GMMA where a downtrend line is drawn from the March to the October peaks on the short term GMMA.

Third, the most recent rally rebound was unable to lift above the upper edge of the long term GMMA. These are all classic end of trend signals. They are discussed in more detail in my book Trend Trading.

Traders who apply RSI divergence analysis will note the Divergence signal starting November 2007 and confirmed in March 2008. Current RSI activity acts as a confirmation signal of developing bearish strength.

The trend analysis suggests there is a lower probability the long term gold trend will continue upwards. The pattern of volatility in price indicates traders can anticipate some fast rallies towards resistance near $920 and rapid retreats towards support near $780. However, these price moves develop within the environment of stronger downward pressure. The key confirmation of bearish pressure is two consecutive weekly closes below support at $780. This developed this week with a weekly close below $780. This sets a longer term support target near $690.

Bullish success is indicated with two consecutive weekly closes above resistance near $920.

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Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.