If Gold Breaches $1,800 a Big Rally Coming: Chart

Tuesday, 16 Oct 2012 | 1:04 AM ET

Technical analysts are often accused of drawing meaningless lines on charts on the grounds that the market knows nothing about these lines. The gold chart shows how useful these lines can be in determining the limits and behavior of future price activity. The long term up trending trading channel continues to define the price activity in gold.

The projection of support and resistance lines helps to define where future price action may pause, develop a retreat, or develop a trend continuation. his allows traders and investors to prepare appropriate trading responses.
Gold has significant resistance features that cap any rapid change in the trend.

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, 790 an ounce. 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 gold price has clustered near this level and been unable to develop a decisive breakout. This does not mean a new downtrend but it shows weakness in the up move.

The second resistance barrier is the value of the resistance level near $1, 800. The combination of trend line A and resistance near $1, 800 adds more drag to the momentum and reduces the probability of a faster price rise.

This increases the probability of a price retreat. However, a price move above $1, 800 has a high probability of developing into a fast rally and moving quickly to the next resistance level.

Gold has been trading in a long term up trend trading channel. The lower edge of the trading channel, trend line A started in January 2010. The upper edge of the trading channel, trend line B, started in May 2010.

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, 900.

A sustained move above the value of trend line A is required before a change to a new uptrend is confirmed. A breakout above resistance near $1, 800 and a breakout above the value of trend line A shows a high probability of gold continuing to rise and trade inside the trading channel.

This points the way to higher prices and a steady resumption of the long term uptrend. 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.

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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