As finishes out a rocky year, its chart is heading toward critical development point, and the yellow metal may fall below $1,000 an ounce.
The yellow metal started 2014 at around $1,200 an ounce, not too far off its current level of around $1,196, but in between it has hit peaks of nearly $1,400 and a trough around $1,140, after 2013's long downtrend from opening that year around $1,664.
The downtrend line is the most important trend feature of the weekly Comex gold chart. This starts from the high near $1,799 in October 2012. Recently, the line uses the high of $1,347 in July 2014 as a confirming anchor point for the downtrend line. Any change in the downtrend will require a price breakout above the value of the downtrend line, currently near $1,239. The trend line defines the downtrend.
The second important feature of the gold chart is the historical support level near $1,180. The gold price did move below this level, but the price developed a consolidation pattern near the $1,180 level.
The combination of these two features – the support level and the downtrend line – create a down sloping triangle pattern. The apex of this pattern -- when the trend line intersects the support line -- is around April 2015.
A sustained move above the value of the trend line will signal a potential change in the trend direction. The first upside target for a successful trend change is near $1,400.
Failure to move above the trend line combined with a sustained move below the support level has a downside target near $970. Between April 2013 and October 2014, gold traded in a broad sideways trading 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 and this calculation is used to set a downside target near $970.
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.
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The consolidation near $1,180 may continue for several weeks. Investors will move into the market when the uptrend breakout or the downtrend continuation is clear. The clear trend direction should develop before April 2015.
The combination of the trend line and the Guppy Multiple Moving Average indicator suggest the trend is still bearish. The long term GMMA remains well separated and this shows investors continue to sell gold.
In addition to a move above the value of the downtrend line, the gold price would also need to move above the upper edge of the long term GMMA to confirm that a new uptrend is developing. The separation in the long term GMMA suggests 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.