Gold has garnered a lot of attention since nearly doubling in price over the past three years and gaining over 600 per cent this past decade.
Gold’s lustre comes from the fact investors have always viewed the shiny metal as a safe investment in times of economic uncertainty. Unknown outcomes for debt ridden countries such as Portugal, Italy, Ireland, Greece, Spain and, more recently, the U.S. have prompted investors to seek out safe havens such as gold.
The subsequent buying frenzy has pushed the price of gold to a new historical high exceeding $1,600 an ounce.
The major trend in gold is up as defined by the uptrending channel illustrated in the accompanying chart. A channel identifies the major or long-term trend of the market. Within the major trend there are a series of fluctuations revealing prominent highs and lows that can be of several weeks duration which reflect the intermediate trends. Then there are small fluctuations within the intermediate moves that are the minor trends.
Trendlines are very useful for determining the price trend. The parallel lines constructing the channel depict where support and resistance to the trend may be anticipated.
During the course of a trend and all the fluctuations which compose it, there is a tendency for prices to follow a sloping straight-line path. During a period of rising prices, this path is determined by a line drawn across the lows of the reactions.
To draw a reliable trendline in a rising market, there should be at least three points of price contact which coincide with the low of a market reaction and these price reactions must occur at progressively higher levels.
In a bull market, the more times a trendline can support a price decline, the more valuable it becomes as a trend indicator. Similarly, the longer the trendline continues without being penetrated, the greater becomes its technical significance.
Once a trend begins in earnest, it has a tendency to persist. Thus, a properly constructed trendline may be touched several times by the fluctuating market during the course of a big move without being penetrated. The longer a trendline holds up, the more significant becomes its eventual penetration as an indicator of trend change.
After a trend is established and a trendline is constructed, a line may be drawn that is parallel to the trendline depicting the corridor within which prices will fluctuate as the trend proceeds. This depicts a channel, which is a reliable pattern for identifying the trend.
In an uptrend, the uptrend line is the channel’s lower boundary and it is constructed first. The upper boundary is the return line and it is parallel and drawn across the highs of each progressively higher advance. The return line points out the areas where reactions to the trend are likely to begin. After a period of upward movement, one must be on the alert for any subtle changes in this repetitive process to determine a change in trend.
Gold prices are technically overbought as they approach the upper boundary of the uptrending channel, so this market is vulnerable to turning back down towards the lower boundary.
At the time of writing, U.S. legislators have yet to come to an agreement on raising the debt ceiling, and the deadline of Aug. 2 will have come and gone as you read this, but I can’t help but wonder if this won’t turn out to be another case of the old trader’s adage: “Buy the rumour, sell the fact.” If it is, gold could be in for a downward correction.
The “trend is your friend” and gold remains in an uptrend until prices break down below the lower boundary of the uptrending channel — a channel which has stood the test of time since gold took off from $681 an ounce in October 2008.
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— David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about grain marketing advisory services, or call us toll-free at 1-888-274-3138 for a free consultation.