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Why $1,540 Is a Critical Level for Gold

Chris Ratcliffe | Bloomberg | Getty Images

The most important number for COMEX gold is $1,540 an ounce. This was the support level tested in October 2011 and in May 2012. It acted as a resistance level in June 2011.

This is the lower level of a long-term sideways trading band that has been in place since October 2011. This trading band developed after the peak high of gold near $1,924 in September 2010.

The upper edge of the trading band is the strong resistance level near $1,800. This resistance region was tested in November 2011 and in March 2012 and again in October 2012.

The reality is that gold has been trapped in the sideways trading band since November 2011. The trading band includes strong rallies and strong retreats. This offers good short term trading opportunities.

In May 2012 the gold price moved below the long term uptrend line. The long term uptrend started in February 2011. Once the price moved below the long term uptrend line it rebounded from support near $1,540. The value of the long term uptrend line acted as a resistance level in October 2012. The value of the trend line was near to the upper edge of the trading band near $1,800.

(Read More: Gold Bears, Beware! Don't Take On Central Banks)

The width of the trading band is $260. This value is used to calculate the potential downside and upside targets if gold price develops a breakout. A move below the support level near $1,540 has a downside target near $1,280. This calculated target is above the historical support level near $1,260. This suggests that any fall below $1,540 has the potential to fall to support near $1,260.

A breakout above the upper edge of the trading band has an upside target near $2,060. This is the width of the trading band projected above the resistance level.

It is important to remember that these targets will take many months to achieve. The rise from $1,260 to $1,540 took 8 months. The market often falls more rapidly than it rises. The fall from $1,800 to $1,540 in 2012 took four months. The current market retreat from $1,800 has taken 6 months. It may test support near $1,450 in the next two or three weeks.

It is also important to remember that COMEX gold has not shown any strong trending behavior after September 2011. The market has strong rally and retreat behavior between the upper and lower edges of the trading band. This is not strong trend behavior. A rally from $1,540 has a low probability of establishing a new strong uptrend with a breakout above resistance near $1,800. Investors will be careful of any fall below support near $1,540.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

NBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.

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GOLD
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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

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