John: Today, Gold (continuous contract) opened at $1,409, climbed to a high of $1,424 and then sold off to a low of $1,383 before closing at $1,393 for a drop of $16. Those who study the fundamentals said the reasons for the drop in Gold included the strengthening of the U.S. Dollar against the Euro and Yen as yields (at a 5-year high) on 30-year treasury bonds bolstered demand for the currency from risk-averse investors. “We’ve seen the Dollar benefit from risk-off,” said Andrew Busch, a currency strategist at the Bank of Montreal in Chicago. “That treasury auction was weak. Banks are selling off and the U.S. Dollar is strengthening.” Let us now examine the price of Gold from a Technical Analysis viewpoint:
Looking at the 6-month daily chart we see that Gold climbed in an almost straight line at a 45 degree angle from a low of $1,160 in the last week of July to $1,390 around the middle of October. Then it corrected down to $1,320 before starting to climb again and reached a new high today of $1,424. The trading pattern since mid-October is an upsloping trend channel bounded by a top blue upsloping resistance line and a green upsloping support trendline. Also identified is a narrow horizontal support channel between $1,383 and $1,390.
Of particular significance is the divergence between the RSI and the Gold price (mauve converging lines). This alone signifies near-term weakness, thus the pullback in the Gold price today should not have been a surprise. We can also see that the high price today is about the same distance above the SMA(50) as the price was in mid-October. These dates are noted by the 2 thin blue vertical lines. Thus, when the Gold price gets too far away from the supporting SMA (approximately $100) it is unsustainable. The bottom support trendline of the channel (green) has had several “hits” (tested several times), thus it can be considered strong long-term support. The SMA(50) also provides strong long-term support as it is moving in parallel with the trendline.
Looking at the indicators:
The RSI, as noted above, has a divergence with the Gold price. It is not overbought, therefore there is no pressure to unwind. The trendline on the RSI (orange) should be monitored to see when the RSI breaks to the upside as this could indicate a bullish reversal.
The Slow Stochastics is overbought and has just had the %K (black line) cross down over the %D (red line). This could cause some pressure to unwind. The ADX trend indicator has the +DI (green line) above the -DI (red line) and climbing with the ADX (black line) trend strength indicator at 24 and turning up. This is in bullish orientation with a strengthening uptrend.
Outlook: We could see further near-term weakening in the Gold price but nothing to threaten a breakout to the downside. I expect Gold will continue to trade within the upsloping channel for the intermediate term.
