Gold Technical Analysis: A Study of Short & Long Term Trends
Gold’s outperformance of the U.S. stock-market over the last 13 years has been (and still is) a very significant trend. Even though this is probably nothing new for regular patrons of financialsense.com, I would still like to visually demonstrate gold’s dominance over the U.S. equity market.
The chart above depicts the ratio between gold and the S&P 500, derived by taking the spot price of gold and dividing it by the price of the S&P 500 Index. The chart is pointing up signifying that gold has outperformed the stock-market to the tune of 534.4% (from 1999 to 2012). If we were to compute this calculation back in 2011 when gold was at its peak, approaching the psychologically critical 2000 level: gold’s outperformance vs. the S&P 500 was 838.9% (please see footnotes 1 & 2 for complete computation details).
Now, the one million dollar question is “where is gold headed to next?”
Herein, I will try to address this question from a technical perspective, by analyzing long and short-term trends in the gold market.
From the longer-term chart above what is interesting to note, is the massive rally of approximately 30% (from 1480 to 1920) which occurred in just two months (Jul - Sept 2011). This period is highlighted by the gray arrows. After the market peaked, we have been consolidating and trending sideways for nearly 12 months (blue arrow). From my experience, what we currently have in the gold market is a very clear descending-triangle pattern which will probably resolve sooner rather than later. And the magnitude of the ensuing move is expected to be 400+ points (derived from the magnitude of the two-month rally: approx. 1500 to 1900).
The descending triangle pattern is typically classified as a bearish setup. However, before jumping into the Bull vs. Bear debate, I want to first go over gold’s price structure with 100% objectivity.
Long-term support & resistance: (refer to the chart above)
- Notable support at 1530 confirmed by three market bottoms (Sept 2011, Dec 2011 & May 2012)
- Resistance at 1800 confirmed by two market tops (Nov 2011, and Feb 2012)
- The downward sloping (red) trend-line is coming in at around 1660 to 1670
- The next area of critical support and resistance is located at the extremes of the July to September 2011 rally; 1480 support vs. 1920 resistance (represented by the gray dashes).
Short-term support & resistance: (refer to the chart below)
Once we zoom-in on gold’s price action we see a well defined ascending triangle and a cup & handle formation outlined by the gray dashes. As long as gold remains above the 1560-1570 range, the ascending triangle is structured for a bullish breakout. And if we remain above the 1580-1590 range, the cup & handle pattern also looks poised to drive gold prices higher. However, if gold closes below 1560, then both of these setups are negated, and longer-term support at 1530-1540 would come into play.
On the resistance side, 1635 marks the top of the ascending triangle, with the 200-day moving average currently acting as a resistance level at 1652.
Gold has been consolidating its gains over the last 11.5 months within a descending triangle pattern. And while this is considered bearish, it is important to note that this pattern has formed within a larger, secular bull market in gold and that it has not been confirmed; confirmation would take place if we decisively break below 1530 and stay below this price on any future retest.
Looking at the shorter-term picture we currently have an ascending triangle (bullish pattern) as well as a cup & handle (bullish pattern). These two patterns are absolutely critical to pay attention to in the coming weeks; if we can hold above 1560 to 1580 a test of higher prices is imminent. Once again, it is important to note that these patterns are not confirmed; confirmation will occur if we decisively break above 1635 - 1640, and stay above this range on any future retest.
In terms of market-timing: if we extend the green trend-line into the future (short-term chart), it will cross over with the red line in November of this year. This means that the short-term pattern must resolve within 3.5 months, and most likely will resolve much sooner than that. I would guess the short-term setup will resolve before the end of September (2012).
I will post an update as soon as something significant develops from these setups. To receive market updates as soon as they are posted on FinancialSense.com, please subscribe to my twitter channel at http://twitter.com/BuyTheBottom
Footnote #1 - If we calculate gold’s outperformance from the lowest ratio value of 0.18 (July 13, 1999) to the current ratio value of 1.142 (Aug 17, 2012), we infer that gold outperformed the S&P 500 by 534.4%.
Footnote #2 - If we calculate gold’s outperformance from the lowest ratio value of 0.18 (July 13, 1999) to the highest ratio value of 1.69 (Aug 22, 2011), we infer that gold outperformed the S&P 500 by 838.9%.