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John: Tonight we look at the price of Gold (continuous contract) in Part 4 of our series on indexes and the Gold Sector.  Gold opened today at $1,346, got as high as $1,349, and then fell sharply to a low of $1,318 before closing at $1,326 – down $20 (1.52%) on the day.  The primary trend in the price of Gold is still very bullish and some consolidation right now is actually a positive and healthy development from a technical point of view as this sets the stage for the next leg up:

Looking at the 6-month daily chart above, we see there has been a significant divergence between Gold and the RSI (mauve sloping lines). This is one reason why the RSI can be such a powerful indicator. A second significant feature of this chart is the breakdown today of the Gold price below the daily EMA(20). This is the first time Gold has closed below this moving average since the beginning of August.  The EMA(20) has provided consistent bullish support between August and today.

The last 5 trading sessions have started the process of unwinding the previous overbought condition which began in September.  Gold today bounced off weak support at $1,320 (short green horizontal line) but I will be surprised if $1,320 holds. The Fibonacci levels (blue horizontal lines) show that Gold can expect significant support at the 61.8% retracement level at $1,300.  Other Fibonacci support is at $1,273 (50%) and $1,246 (38.2%).   Note the 38.2% level provides very strong support as it coincides with the strong pivot support (horizontal green line) – this is our “worst case” scenario for a decline.

Given the strength of the CDNX, our very reliable leading indicator which has held up extremely well in the face of significant single-day drops in Gold on 2 occasions now this week, and the strong support we identified the other day at 380 on the TSX Gold Index, a powerful case can be made that Gold on any additional weakness (quite limited) will most likely not drop below the middle Fibonacci level cited above at $1,273.  Note that the 50-day moving average is currently at $1,283 and also provides support.

Looking at the Indicators:

The RSI is being unwound from the overbought condition.  It’s now at the 40% level and pointing down. I expect this to continue down to the 30% level.

The Slow Stochastics has both the %K (black line) and the %D (red line) falling sharply at 35% and 53% respectively. This too is unwinding the overbought situation and I expect these indicators to continue falling to possibly below the 20% level.

The ADX (black line) trend indicator has the +DI (green line) slightly below the -DI (red line) at 20 and 21 respectively. The +DI is falling sharply and the -DI is rising. I expect them to continue in these directions for the immediate future. The ADX (black line) trend strength indicator has reversed downward at 33 indicating a weakening of the bullish trend. Note the +DI peaked before the ADX black line.

Outlook:  Gold is completing the overbought unwinding process and appears to be heading lower to find a support level, most likely between the Fibonacci levels from $1,273 to $1,300.   At present Gold is sitting on weak support at $1,320 but the indicators show that further weakness is to be expected in the immediate future.  Remember, however, the primary trend in Gold is still very bullish and this consolidation is both positive and healthy in terms of laying the foundation for the next explosive move which could take the yellow metal to $1,500 and beyond.