Charting Asia

Gold Likely to Retest $1,920: Charts

Gold or silver, which is the most compelling? Both are used as an alternative to fiat currencies and in this area attention has shifted from the U.S. dollar to the Euro. It is the increasing strength in the U.S. dollar that is driving down the price of gold and silver. Assessment of the precious metals also swings on assessment of the U.S. Dollar index.

Our main focus is on gold, but this cannot be easily separated from the influence of related markets. The Dollar Index developed a symmetrical triangle. The breakout on the upside has an initial target near $0.785, just below the substantial resistance level near $0.795.

This reduces the probability of the U.S. dollar quickly moving above resistance and resuming a march to the next resistance level near $0.815. This suggests the strength of the dollar may be temporary and this has an impact on the raw chart analysis of the gold price.

There are two features of the gold price trend. First is the role of the long-term trend line. For much of 2010 this uptrend line acted as a support level. The price retreated to this level and then rebounded. In early 2011 the priced dropped below the line and the line acted as a resistance level.

In July the price moved above the line and the trend line again resumed the role as a support level. This breakout was also defined with a parabolic trend line. As expected the price dropped very rapidly from $1,917 to $1, 706 per ounce when the parabolic trend ended. The subsequent behavior has broadly used the trend line as support, with some temporary dips below the line.

This trend line suggests a continued slower rise in the gold price. However, this type of long-term trend line is less useful in determining exact price levels where a trend changes. The longer the time period, the greater the level of compromise in placing the line.

The indicator provides a second feature and confirming indicator of uptrend continuation. The long-term group of moving averages, shown in red, provides clues to the behavior and thinking of investors. These are well separated suggesting strong buying support whenever a price dip develops. In the price fall following the end of the parabolic trend there was no compression in the long-term GMMA confirming continued investor interest and buying.

Whilst the long-term GMMA remains well separated there is a high probability the uptrend will continue with a retest of the highs near $1,920. The broader market indecision increases the volatility of price activity, but it does not threaten the underlying trend.

The current price retreat could retest support near  $1,720 and remain consistent with a continuation of the uptrend. This level is also the lower edge of the long-term GMMA. Traders are buying on the rally rebounds from the upper edge of the long-term GMMA, currently near $1,800. The value of the long-term up trend line is near $1,820. This indicates a combination of two powerful trend support features in the next few weeks. This may form the foundation of strong continuation of the uptrend.

Silver has a much weaker uptrend pattern and shows a key break below the current short-term uptrend line. Despite this silvercontinues to outperform gold with a 33 percent rise from $33 to $44 per ounce compared with a 12 percent rise in gold from $1,700 to $1,917 per ounce. The silver trend is less stable and more variable than gold with increased rally and retreat behavior. It’s a more difficult, but more profitable, trading environment. For good traders this gives a silver lining for the gold price activity.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – 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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