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Gold in Bear Territory, Upside Capped at $1,700: Charts

Monday, 11 Jun 2012 | 11:23 PM ET

Weak euro/dollar, strong dollar Index and weakening gold price. That’s the new relationship and it’s infuriating some gold bugs. As much as many traders think gold should go up the weekly chart of Comex gold suggests there are some serious barriers to a price rise back to $1,750 an ounce or $1,850.

The first dominant feature on the chart is the long term up sloping trading channel. The lower edge of the channel is defined by the long term uptrend line A starting in 2010 April. The gold price has tested this trend line as support level in 2011 December and again in 2012 April. The trading channel is defined by the upper trend line B. This is parallel to the lower trend line A. The two trend lines create an up sloping trend channel.

The sustained downside break below this trading channel is the first move below the lower edge of the channel in more than 16 months.

Technically this is a major and significant change in the trend behavior. It’s bearish. The downside move also changes the role of the lower edge of the trading channel from support to resistance. Any gold price rally will now need to move above the value of this trend line A, which is acting as a resistance level. This caps the current rally around $1,690.

The second dominant feature of the chart is the downtrend line C that starts from the high near $1,930. This trend line C acted as a resistance level from 2011 September to 2012 January and it defined the downtrend.

The move above the value of the trend line B in 2012 January was bullish because it was also a move above the upper edge of the trading channel defined by trend line B. This breakout move failed as it reacted away from resistance near $1,800.

The nature of trend line C also changed. The line now acted as a support level and the gold price has continued to slide down this sloping line. This is bearish behavior. The third dominant feature is the relationships between the long and short tern groups of averages in the Guppy Multiple Moving Averages indicator.

On the weekly chart the short term group of averages has dropped below the long term group of averages for the first time since 2009, January. This also suggests a significant change in the trend behavior.

Gold has developed a support level near $1,550 and this level has been tested in 2011 June, September and 2012 January. It is currently under test again. Failure of this level has support near $1,400.

Gold has all the technical characteristics of a significant change in trend direction. A sustained move above the value of trend line A is required before a change to a new 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 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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