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The fall below the support level near $1,180 is a very critical change in the gold price activity. This follows the fall below support for Silver, which always leads gold market price behavior. Support near $1,180 was very strong; it was successfully tested on June 2013 and January and October, 2014. This was also a strong historical support level in May and August, 2010.
The close below $1,180 support is significant and confirms that the downtrend is very strong.
Between April 2013 and October 2014 gold traded in a broad sideways band between $1,180 and $1,390. The width of the trading band is measured and this value is projected below support at $1,180. The band is $210 high; this calculation is used to set a downside target near $970.
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The calculated target is a little below the long-term historical support and resistance level near $980. This suggests there is a high probability that gold will fall to around $980 before any new consolidation pattern develops.
The Guppy Multiple Moving Average (GMMA) breakout pattern failed to fully develop. This is a pattern of test and retest. The first test of the down trend is at point 1; this touched the lower edge of the long-term GMMA (in red). The second test touched the upper edge of the long-term GMMA. The third rally test in July 2014 failed to break above the upper edge of the long-term GMMA. The peak of this rally is used as the new anchor point for the downtrend line.
The long-term GMMA remains well separated and this shows investors have again started selling. The combination of the downtrend line, the fall below the critical support level and the separation in the long-term GMMA confirm the downtrend in gold will continue. The downside target is near $980.
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 CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.