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Gold Upside Capped at $1,800 Despite Bullish Factors: Charts

The Dow Index is slipping below 13,000. The U.S. dollar Index is hovering near 80 in a weak symmetrical triangle pattern. The euro/dollar continues in a downtrend with more weakness developing. All these factors should be bullish for gold.

But there are three important resistance features on the weekly Comex gold chart. The first feature is the strong resistance near $1,800/oz. The gold price has moved above this level, but this level developed strong resistance in November 2011 and again in February 2012. There is a high probability $1,800 will act as a strong resistance again.

This limits the rise in any rally. The second important feature is the long-term uptrend line. This uptrend line started in April 2010. The gold price has tested this trend line as support level in December 2011 and again in April 2012. This trend line is the lower trend line in an up sloping trading channel.

The third important feature is the upper trend line. This is parallel to the lower trend line. The two trend lines create an up sloping trend channel.

The normal behavior for the gold price since May 2010 is to trade within the boundaries of the up sloping trading channel. The breakout above the trading channel in November 2011 and February 2012 is unusual. These breakouts have created a strong resistance level near $1,800.

There is a high probability that gold will continue to trade in a rally and retreat pattern of behavior between the trend lines that define the trading channel. This gives short-term rally trading opportunities. The value of the upper trend line in the trading channel is near to $1,800.

The interesting feature is that the gold price chart does not appear to react to the changes in the Dow or the changes in the dollar exchange rate. The weakness in the gold price is a contradiction because other factors suggest the gold price should be strong. This contradiction shows traders need to use caution.

The uptrend is strong and stable and the trading activity is not created by fear and worry. The long-term uptrend looks safe but any rallies are limited by the strong resistance features. There is a high probability that the rally will retreat from the upper trend line and the resistance level.

The critical situation for the up trend is when the value of the lower edge of the trading channel trend line moves towards $1,800. The price will vibrate between $1,800 and the value of the lower trend line. If the lower trend line fails as support then the long-term uptrend in gold could also end. The first downside support level is near $1,500.

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

Asia Economy