Gold’s Make or Break Zone Coming Up

Jul 31, 2008: 8:04 PM CST

Gold prices have taken a downward move which may have surprised many traders.  A ‘make or break’ moment (or zone) is in the works, the resolution of which could give us a significant clue about gold’s next move.  Let’s see it.

Gold Daily Chart:

Price has formed a three-month triangle consolidation pattern, which resolved with an upward break (and target of $1,000), and renewed bullish sentiment took over.  Price fell just shy of this target, and from making new highs, and is now in a potential ‘roll-over’ pattern.  What’s striking (to me) in the chart is the mini bear flag (not shown) which formed abruptly which culminated in two dojis at the (now) falling 20 period EMA.  It was almost as if the brief up-rally at the end of July was over before it started.

A doji at resistance following a momentum move (notice the new momentum low in July) is often a wonderful place to enter a trade – if you were quick enough to realize this opportunity (I wasn’t).

There appears to be almost a ‘magnet’ at the $890 to $895 per share level, which culminates in the apex of the triangle pattern and the rising 200 day moving average.  However, price is currently sitting directly at support via the 20 week EMA.  Will it hold?

Weekly Chart:

Price has not respected this average throughout 2008, so I’m not sure it will do so again (by ‘respect,’ I mean ‘find support’).  Nevertheless, this is a concern (temporarily) for current gold bears.  Should price break through this level AND the $890 level as construed on the daily chart, the next ‘line of support’ (or bull/bear battle) will take place at the 50 week EMA, which currently stands at $860.95. I put a “?” there to indicate whether or not we get to this level and if it will hold.

According to the ‘pure price method’ on the weekly chart, price has formed a lower (swing) low and a lower (swing high).  Should price take out the lows of 2008 (around $850), then we would officially classify the weekly chart as being in a downtrend.  We’re not there yet, but are close.  I remain in an official ‘holding pattern’ and in a ‘wait and see’ pattern to see if these levels I mentioned hold.

If they do hold (support), then odds favor higher prices yet to come as the bears surrender.  If they fail to hold (price breaks beneath $900 and especially $890), then expect a test of $850 and potentially beyond (to the downside).

Right now, as I interpret it technically (from the chart perspective) price hinges between these zones, and it will be up to supply and demand (and investor psychology) to determine the victor.  It would likely be wise to join the winning side and trade in that direction once this indecision is over.

1 Comment

One Response to “Gold’s Make or Break Zone Coming Up”

  1. Richard Says:

    I really like your first chart because it shows gold in breakout since June 23, 2008 when it escaped its former pennant consolidation. It was at this time that the yen carry traders sold out of the BRICS, EEB, because of risk aversion to inflation and went long gold.

    Yes, gold traded up today, while the US Dollar, stocks and oil trade lower.

    Stocks like the Russell 2000, IWM, which closed at 71.49, are in a pennant pattern; they are likely to fall from theirs and gold is likely to head higher.

    Gold is not riding oil’s coat tail any more! Gold relative to oil, GLD:USO, is rising, documenting an investment demand for gold.

    More analysis is available on the linked webpage.