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Has Gold Turned Bearish?

05/17/12 11:52:42 AM
by Chaitali Mohile

Is the bearish range-bound price action and breaching of the support line highlighting bearish days for the gold spot price?

Security:   $GOLD
Position:   Sell

In the past two months, the spot price of gold ($GOLD) has been forming a series of lower highs and lows. The trading range is wide, enabling easy and safe trades. But the lower top and bottom have formed a short-term descending channel on the daily time frame chart in Figure 1.

Neither of the two trendlines of the channel is breached. The price is perfectly zigzagging within the channel. The rally from the lower trendline support gave a short-term buying opportunity for traders and a short sell is triggered near an upper trendline resistance.

Graphic provided by:
The average directional index (ADX) (14) is completely engulfed by the bears. A downtrend is showing a robust bearish force, which may pull down the rally even more. However, the full stochastic (14,3,3) has formed a positive divergence, suggesting a pullback rally within the descending channel. In considering the previous upward price movement from trendline support, traders can trigger long positions from the current level.

Although small buying and selling opportunities for $GOLD can be grabbed, the descending channel is itself a bearish formation. The index could continue to remain weak.

The bullish rally in $GOLD has formed a long-term ascending channel on the weekly time frame chart in Figure 2. The index has been steadily climbing to higher levels on the price chart. An upper trendline resistance was once violated by the price rally. However, the bullish breakout in Figure 2 could not sustain above the newly formed trendline support. An overheated uptrend at 60 levels discouraged the bullish breakout, and as a result, $GOLD plunged back into its ascending channel. The failed breakout and the overheated uptrend were the major reversal signals in Figure 2.

Graphic provided by:
Later, $GOLD challenged the lower trendline and the 50-day moving average (MA) support (that was untouched for the past two years). Eventually, the ascending channel as well as the 50-day MA support broke downward. The index has witnessed a robust bearish breakout due to an overheated uptrend. The ADX (14) descended much below the 15 levels, weakening the trend.

Currently, the trend is directionless and the buying and selling pressures are equally low. The blue arrows on the stochastic oscillator show that the indicator has surged from the oversold region; it has never slipped below the 20 levels. If we anticipate that $GOLD would follow a similar pattern and initiate an ascending move, the 50-day MA resistance would terminate the relief rally.

In such a scenario, $GOLD would tumble towards its next immediate support at 1535 and 1523 levels. These two are the major support levels for the index, and hence, the descending rally must establish support here. However, price movement near 1535 and 1523 should be observed carefully before posting any trades.

Just for ready reference, the uptrend on the monthly time chart is highly overheated and is reversing. $GOLD is likely to remain weak for the next few weeks.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
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