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The downtrend in gold is under threat

AP

The rally in COMEX gold prices from $1,250 has gold bulls excited. After more than 2 years of falling prices is this finally the turnaround that gold bulls have been hoping for?

The gold chart doesn't give a clear answer but it sets key trigger points that allow traders to make a better decision. Let's start with the bearish view and look at features that suggest the rally is temporary and the downtrend will likely continue. There are three resistance features that can limit the rally.

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The first is the value of the long-term downtrend line. The current value is near $1,320. The second is the value of the long-term Guppy Multiple Moving Average (GMMA). The upper edge of the long-term GMMA is near $1,350; this also acts as resistance. The third is near $1,390; gold developed a strong resistance near this level in September 2013 and March 2014.

Together these features suggest that the downtrend remains strong. The long-term group of averages in the GMMA indicator is well separated, while the long-term group of averages continues to move lower and does not show signs of compression.

The bears say that a rebound rally from near $1,260 has a low probability of developing in to a trend change because these three features make it difficult for gold prices to develop a strong rally and breakout into a new uptrend.

However, the bulls believe the price can break above these three resistance features. They point to the double-bottom pattern near $1,180 in January 2014 and note the rally in March 2014 reached $1,392 before retreating. The bulls believe the rebound from $1,250 is a continuation of the double-bottom pattern with an upside target near $1,580.

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In the current condition there is more chart evidence to support the bears. Gold has to overcome significant resistance features before a new uptrend can develop. The ability to move above $1,390 is a key feature for the development of any sustainable uptrend.

The chart patterns suggest that gold is forming a long-term base pattern around $1,250. Traders are watching for confirmation that the rally activity can overcome resistance and develop into a new uptrend. Compression in the long-term group of averages in the GMMA indicator will provide additional confirmation of the trend change. When markets are beginning to develop a trend change traders will watch for breaks in key price levels. Chart analysis identifies the key levels. Cautious traders will wait for breakout confirmation before entering the market.

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

Asia Economy