While gold prices have been on the rise on expectations of further monetary stimulus from both the U.S. Federal Reserve and the European Central Bank, the recent uptrend could be limited.
The breakout in gold has gold bugs in a frenzy but gold has significant resistance features that cap any rapid change in the trend. Before traders get too excited they should note the small up sloping triangle which has formed in the downtrend.
The price consolidation near $1,620 an ounce is the base for the current breakout. The base of the triangle is small, and gives an upside target near $1,730. This is not the type of pattern breakout that signals a major change in the trend because the target projection is limited.
We look at the resistance barriers that limit the potential rise in the gold price.
There are three resistance barriers that limit the potential rise in the gold price. The first resistance barrier is the value of trend line A which is now acting as a resistance level. The current value is near $1,730. This is the lower edge of a long term uptrend channel so there is a high probability this will act as a strong resistance feature.
The second resistance barrier is the value of the resistance level near $1,800. Currently this is about the middle of the up sloping trend channel defined by trend lines A and B.
This trend channel acts like an airbag and drags on the momentum of any rally when the price enters the channel. The combination of a resistance near $1,800 adds more drag to the momentum and reduces the probability of a faster price rise.
The third resistance barrier is the value of trend line B. This is the upper edge of the lone term up sloping trading channel. Current value is near $1,855.
A sustained move above the value of trend line A is required before a change to a new uptrend is confirmed. In this situation there is a high probability of gold continuing to trade inside the trading channel.
This points the way to higher prices and a steady resumption of the uptrend. However, the price must be able to breakout above the value of trend line A before this can be defined as a trend rather than just a rally.
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.
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