Where Should You Buy Gold?

10/14/04 09:31:38 AM

by Kevin Hopson

Gold is showing signs of a short-term top, but weakness should be bought.

Security: $GOLD
Position: Accumulate

The continuous gold contract ($GOLD) recently breached the bottom parallel line of the blue pitchfork, as illustrated in the six-month chart. This was expected, as a failure to test the blue median line prior to testing the bottom parallel line (price failure rule) indicated a break of support here. In addition, the average directional movement index (ADX) trend indicator has started to turn negative. More specifically, note how the green (positive) line is beginning to cross below the red (negative) line. This indicates a possible change in the short-term trend.

However, as you can see in the chart, previous corrections have been short-lived. Why? The long-term uptrend remains intact and the path of least resistance is still higher. As a result, I would focus on three key support levels as opportune places to buy gold if the selling pressure continues. For example, the first major support level comes into play around $409. This is the site of the contract's 50-day moving average, the red warning line, the 50% retracement level from the September to October rally and the 38.2% retracement level from the July to October rally.

Figure 1: Gold continuous contract

Graphic provided by: StockCharts.com.

The second support level comes into play around $404. This is the site of July's uptrend line, the 50% retracement level from the July to October rally and the 38.2% retracement level from the May to October rally.

The third and final support level comes into play around $398. This is the site of May's uptrend line, the 1B channel line, the 61.8% retracement level from the July to October rally and the 50% retracement level from the May to October rally. As you can see, there is a significant amount of confluence at each of these support levels, making them good places to buy.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.