The most important number for Comex gold is support near $1,540 an ounce and it has failed. This is the support level tested in October 2011 October and May 2012. It acted as a resistance level in June 2011.
This level has been a significant influence on the market so its failure as support is also significant. 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 $,1924 in September 2011.
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The upper edge of the trading band is the strong resistance level near $1,800. This resistance region was tested in November 2011, 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. The break below $1,540 is a critical change in the trend. If the fall is further confirmed on a weekly chart with additional closes below $1,540 then it signals the beginning of a new bear trend in gold.
The trend change signal first started in May 2012 when the gold price moved below the long term up trend line.
The long term uptrend started in February 2010. 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.
The width of the trading band is $260. This value is used to calculate the potential downside and upside targets if the 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. It is important to remember that this downside target 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. The fall towards $1,260 may also take several weeks.
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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. The fall below $1,540 signals the resumption of strong trending behavior. Traders will short the rallies.
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 CNBC Asia 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.
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