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Gold — Long Term Prospects Shine

Gold has enjoyed a good run up the past 12 months, and this is mainly due to uncertainty in equity markets (have we reached a bottom yet?) and the oil rally in May. Is there still more upside potential in bullion?

Gold is moving towards resistance at $1,000. The gold price shown on the NYMEX weekly Gold chart has several interesting features. The short-term uptrend is defined by line B and this is used for trade management.

The rise in gold was dominated by a long-term uptrend. The long-term uptrend line A starts in July 2005, and uses the lows during June 2007 as the second point for the position of the trend line. This long-term trend was broken in October 2008, and many people believed this was a signal for a new long term downtrend. They were wrong — support and resistance defines the character of this market.

The most important trend breakout developed in September 2007, when the price moved above $690. This level had been a very powerful long-term resistance level. It wasn't surprising when the market retested the $690 level in 2008 and used this as a support and rebound level.

The location of support and resistance levels is an important feature that defines the price activity. The rebound from support near $690 in November 2008 was very rapid and the price moved above the long-term uptrend line in December 2008. This rise meant the long-term uptrend that had started in July, 2005, was again the most important support level for the uptrend.

Horizontal support and resistance levels had developed near $840 and $930. The strongest resistance level is near $1,000. The $840 level was a weak resistance level in 2007 and it has been a middle point consolidation level in 2008. This combination of long term uptrend line and support and resistance levels defines the way the trend will move towards resistance at $1,000.

The combination of resistance near $690 and the long-term trend line in 2005 to 2007 created an up sloping triangle pattern. The target for this chart pattern is $930. This level has acted as a new resistance level several times since the end of 2007. A move above the $930 level is bullish and establishes the condition necessary for a strong rally towards $1,000.

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A retreat from the $930 area can test support from the long term uptrend line. This support is currently near $865. The level of this support continues to rise as the up trend line develops. This increases the upwards pressure on the price and increases the probability of a successful rally to resistance at $1,000.

A successful breakout above $1,000 has a first target near $1,150 and a long-term target near $1,300. These price levels may take many months to achieve. Traders watch for price to move above or below the significant trend line and support/resistance levels before they take action.



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

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