GO
Loading...

It will take a lot to break gold’s downtrend, charts show

In April, we wrote that a move by gold prices below the support level near $1540 had a downside target near $1280. This calculated target is above the historical support level near $1260 so this suggested that any fall below $1540 has the potential to fall to support near $1260.

We suggested that this downside target would take many months to achieve. The development, however, has taken just two months to materialize. Bullion fell to $1182 in late June before developing consolidation near $1260.

COMEX gold weekly chart

The same technical analysis now suggests that it would take a lot to break the current gold downtrend. This is seen by the comparison of two groups of averages: the short term group of averages shows the behavior of traders; while the long term group of averages shows the behavior of investors. Both groups are widely separated, and as the degree of separation continues to widen, the strength of the downtrend becomes more pronounced.

(Read more: Gold could plunge another $500, history shows)

Any rally will be capped by the upper edge of the short term group of averages, currently near $1400. Momentum slows as it rises through this group of averages, so there is a high probability of a rally and retreat behavior.

Meanwhile, the wide separation in the long term group of moving averages also provides a formidable resistance barrier. This group of averages currently straddles the long term resistance level near $1540 which was the base of the sideways trading pattern that defined the end of the gold uptrend.

A trend change is signaled when the short term group of averages compress and begin to turn upwards, with the trend change confirmed when the long term group of averages also compress. At this point, there is no sign of this behavior on the gold chart. Traders will watch for consolidation around the $1260 level prior to a trend continuation.

(Read more: Does gold's jumpmean Fed tapering won't happen?)

A break below $1260 has a downside target near $1000. This is calculated using the same methods that gave us the downside target near $1260 after the fall below $1540. 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 $1540 was a critical change in the trend. The width of the trading band is $260. This value is used to calculate the potential downside at $1540. The same value is used again to set the new downside target near $1000. The $1000 level has acted as a support and resistance level between 2009 February and 2009 October. There is a high probability it will act as a support level again.

(Read more: Bargain hunters eye commodities, but may have to wait)

The fall below $1540 and below $1260 signals the resumption of strong trending behavior. Traders will short the rallies.

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

Asia Economy