It has been a wild summer for gold as the yellow metal made back to back to back triple digit moves. Short-term technical studies point to further volatility but overall, the long-term bull market is still very much intact.
This week, for the second time in as many weeks, gold poked its head above the $1900 per ounce only to be immediately met with sellers. On the charts, the patterns on both occasions are called bearish one-day reversals. In English, it means that enough investors thought 1900 was expensive and flooded the market with their holdings for sale.
This chart shows the very popular SPDR gold shares exchange-traded fund (ETF) and an equivalent resistance, or price ceiling, at 185-186. The pattern is not as textbook clean as it is in gold itself but this ETF is far more available for investors than gold futures contracts or physical bullion.
A seasoned chart watcher will notice two items immediately. First. The rally accelerated in July making the pace of gains unsustainable. Gold needed to rest, if not pull back, before forging higher over the long-term.
The second item is the falling momentum indicator at the bottom. The relative strength index (RSI) measures how fast the market is moving and in most cases price and indicator move together. However, since early August, RSI has been falling while prices moved into the record books. This divergence between price and indicator is a warning that the market is getting tired.
One analogy I like to use is that of a ball thrown up into the air. Even though the ball is going up, its speed, a.k.a. momentum, is going down. Eventually, gravity will be overtake the force used to throw the ball and it stalls. Without a new source of energy it will start to fall.
The same concept applies to the markets. Gold and the gold ETF are both stalled as buyers and sellers are evenly matched. Without a new source of energy in the form of new buyers, this market can then fall.
Right now, the tug of war is dominating. Resistance on the charts is set by the two peaks shown. Support is near the August 25 low of 166 (just above 1700 for gold itself).
Again, all of this short-term wrangling is taking place in the context of a long-term bull market.
Michael Kahn, CMT, writes the twice weekly Getting Technical column for Barron’s Online and publishes the daily Quick Takes Pro newsletter. His free technical analysis chart of the day is offered at www.QuickTakesPro.com.