×

Gold Will Keep Shining Above $1,000: Charts

Gold glittered on Tuesday as prices rose to their highest levels this year -- futures briefly hit $1,000 while spot prices rose to six-month highs. Will the precious metal continue to shine at this level?


First of all, one needs to understand the behavior of gold prices. Gold attracts more emotional and political attention than any other commodity. Its relationship with portable wealth, money and Government adds a unique character to its behavior.

The well-established resistance level at $1,000 is a psychological resistance barrier and is not related to the supply of gold or the demand for gold. The movement is created by political features that have an impact on currency movements and the U.S. dollar.

  • Gold Futures Hit $1,000 as Investors Seek Refuge
goldbars_close_200.jpg
AP


The resistance level near $1,000 is created by the high in 2008 and the high in February 2009. This is a powerful resistance level and creates a double top pattern. While the price has moved a little distance above this level, it has not been able to remain above this level.

The rise in gold is dominated by a long term up trend line. The up trend line starts in July 2005, and uses the lows during June 2007 as the second point for the position of the trend line. This long term trend was broken in October 2008. However the market rebounded and in recent months it has used the value of the long term trend line as a support level.

The combination of the up sloping trend line and the resistance level at $1,000 creates an up sloping triangle. This is a bullish pattern and it is used to calculate upside breakout targets.
Additionally the gold market has very strong support and resistance levels. The current support level is near $920 while the current value of the long term uptrend line is near $910. This confirmation provides two support areas that have a similar value.

A retest of resistance near $1,000 would create the third test point for this resistance level. There is increasing bullish pressure with gold. The price activity is moving towards the apex of the triangle. A successful breakout above $1,000 has a first target near $1,180.

No Title_32728310

A successful breakout will reach this target very quickly. The key feature of any sustainable breakout is the way support develops when the market retreats from the first breakout target. A retreat after the breakout above $1,000 followed by a strong rebound from $1,000 is a very bullish development. This confirms the higher long term target near $1,300.

Gold has a way of engaging emotions and blinding clear analysis. There are two important caveats in this analysis.

The first is the dip below the long term uptrend line in November 2008. Is it valid to ignore this dip and place the uptrend line as shown in the chart? In a broad sense, the answer is, yes. In the period 2005 to the current date, this trend line has provided support for the vast majority of the time. We can use it as a provisional support level for the future. However, its power as support is demised by the November 2008 dip. This also reduces the power of the up sloping triangle pattern.

The second is the development of triangle patterns, and they take time based on weekly charts. The intersection point of the upsloping trend line and the resistance level -– the apex of the triangle –- occurs in October 2010. This suggests traders should not get too excited about the push towards $1,000. This could develop into a triple top pattern with price pulling back and retesting the long term trend line. This pattern of behavior shows there is increasing probability of a break above $1,000. It does not provide a guide to when this will happen.

The third is the measurement of the triangle targets. This is useful for broad analysis of weekly charts. The base of the triangle develops from November 2008 to February 2009. This is around $180 in height. This is the target projection figure that is used to estimate the breakout target above $1,000.

Usually when psychological levels are broken the market develops a very strong new trend momentum. Many investors are buying gold because they believe there is a high probability the market will be successful in moving above $1,000 resistance. The pattern of price behavior suggests there will be more retreat and rebound activity before a successful resistance level breakout develops.

The most important feature of the gold price chart is the way it adds fizz to gold stocks. Traders do not focus on the 18 percent return from a gold breakout. They focus on the acceleration of price in gold producers, gold miners and gold explorers. The lower, speculative end of the gold market has already delivered returns of 30 to 60 percent. A move in the gold price above $1,000 will boost those stock returns into triple digits. This is the true location of the golden triangle.

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.

CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.