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Is gold on the verge of a breakout rally?

AP

Gold prices have seen a rebound in recent weeks after hitting a four-month low in June and technical analysis suggests there is potential for this rally to develop into a genuine trend breakout.

The key feature of the weekly Comex gold chart is the downtrend line. This starts from the high near $1,799 notched in October 2012. Most recently the line uses the high of $1,392 in March 2014 as a confirming anchor point for the downtrend line. The current breakout above the trend line has the potential to develop into a genuine trend break, and here are three reasons why.

The first feature is the double test of support near $1180. This is not a double bottom pattern, but it can be used in a similar way to estimate upside targets. The double test of support near $, has a pattern that includes a rally peak near $1,380 in August 2013. The rally earlier this year also reached this peak high near $1380. This creates a consolidation band. A move above $1380 is a consolidation band breakout. The width of the band is measured, and the value projected upwards. This gives an upside target near $1,580.

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The breakout target is lowered to near $1580 because there is strong historical support near this level and this will act as a resistance level for any new uptrend.

The second feature is the behavior of the Guppy Multiple Moving Average indicator. The long term group of averages has moved sideways and begun to compress. This shows investors have stopped selling and some investors are becoming buyers.

The third feature is the pattern of test and retest. The first test of the down trend is at point 1. This touched the lower edge of the long term GMMA. The second test touched the upper edge of the long term GMMA. The third rally test may breakout above the upper edge of the long term GMMA. This development signals a high probability of a sustainable uptrend breakout.

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Traders watch for this current rally to move towards $1,380 and then retreat. The retreat will find support near the upper edge of the long term GMMA and then develop a new rebound. This will be confirmation of a new sustainable uptrend.

A move below the downtrend line will confirm that the downtrend is still in place. In this situation the market will retest the support level near $1,180. This is a low probability outcome.

The technical chart behavior suggests gold is developing a new uptrend. Aggressive traders are entering the market as the price moves above the downtrend line. Cautious traders will wait until the price moves above $1380 and the uptrend is confirmed.

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.

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

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