×

What charts say about the outlook for gold

PROSPECTING GOLD
AP

Weaker-than-expected U.S. housing data lifted gold prices from a seven-week low on Monday, but charts suggest that investors shouldn't get too excited.

Gold got some reprieve on Monday, rebounding from a seven-week low intraday after data showed U.S. home resales for January declined to a nine-month low. The data are unlikely to dent the overall trend, however; gold posted its fourth consecutive weekly decline last week amid a stronger U.S. dollar and expectations that the Federal Reserve will raise interest rates later this year.

Meanwhile, the outlook on charts is bearish.

The weekly gold chart has developed a complex technical pattern with three features: a downtrend line; strong historical support; certain pattern behavior in the Guppy Multiple Moving Average (GMMA) indicator.

The downtrend line starts from the high near $1,799 in October 2012 and most recently used the July 2014 high of $1,347 as a confirming anchor point. The breakout above the downtrend line in January 2015 is the first evidence of the potential for a new uptrend to develop.

From October 2012 until January 2015 the downtrend line acted as a resistance level, but it now acts as a support level following the breakout. Gold prices are sliding down this line towards historical support - the second feature. Prices have not moved below strong historical support near $1,180, but a consolidation pattern developed near that level prior to the rally rebound.

Meanwhile, behavior in the GMMA remains bearish because there is not any significant compression in the long-term group of averages (in red). This suggests that investors remain committed sellers; they swamp any rally with sell orders. The GMMA does not show the classic relationships that suggest a developing trend reversal. Compression must develop in the long-term GMMA before a rally can be sustained as a trend reversal.

Read MoreThis is why gold may rise: Will Rhind

Taken together these bearish factors lend to two potential outcomes.

The first is the development of a prolonged consolidation period using the support level near $1,180. This often develops as a sideways trading band. Gold has support near $1,180 and resistance near $1,300; a breakout from this trading band gives an upside target near $1,420. Recent resistance is near $1,390, so any breakout would have difficulty reaching the $1,420 target.

The second bearish outcome is a failure of support near $1,180. 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 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 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 if support near $1,180 fails.

The combination of the trend line and the GMMA suggest the trend is still bearish. The long-term GMMA remains well separated, suggesting investors continue to sell gold. Gold needs a sustained move above the upper edge of the long-term GMMA to confirm that a new uptrend is developing. It's too early to know if this will develop into a consolidation pattern, or a failure of support. However there is a low probability of a new sustained uptrend developing in gold in the near future.