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John: Today, Gold (continuous contract) gapped up at the open from Friday’s close at $1,387.50 to $1,405.90. It then rose to a high of $1,410.60, fell to a low of $1,392.90 and then recovered slightly to close at $1,397.90 for a gain of $10.40. The bulls are clearly in control as demonstrated by the chart and analysis below.

Looking at the 5-month daily chart above, we see that between November 1 and the end of December the price pattern was a “head and shoulders”. The details and measurements of this pattern are shown on the Gold chart below from Feb. 8:

This is a textbook pattern example. After breaking below the neckline at the beginning of January, Gold had 3 down days before it rallied to touch the neckline again. This was normal and the expectation was for this pattern to continue its downward trend toward our target of $1,300 (green horizontal line).

As you can see, Gold moved down to a low of $1,308 before rebounding to the upside. From there the trading has formed an upsloping channel as shown by the top upsloping blue line and the green upsloping support line in the first chart.  It is interesting to note that recently two writers did not draw the upsloping channel as shown but drew an upsloping wedge. There is a very big difference here in that an upsloping channel is bullish whereas an upsloping wedge is bearish. This is just one instance that shows that technical analysis is a mixture of art and science.

In the first chart I have drawn a resistance level at $1,406 (horizontal blue line) but there is a resistance band between $1,406 and $1,410. We also can see that this resistance level, the open today and the resistance of the channel, all coincide at $1,406. The extension of the neckline is also a resistance and must be considered in the future.

The daily SMA-50 (blue line) moving average provided close support until the breakdown of the neckline but now after drifting sideways for nearly 2 months it appears to be turning up (bullish).  The daily SMA-200 (red line), which represents the long term trend, is pointing up as shown in the first chart.

Looking at the indicators:

From the point of the low at $1,308, the RSI reversed from the 30% level and has slowly climbed to the 65% level – bullish.

The Slow Stochastics (SS) has both the %K (black line) and the %D (red line) in the overbought area at 92% and 94% respectively. This can remain overbought for a long time when Gold is in a strong uptrend, so for the moment it is of no concern.

The ADX trend indicator shows that between the beginning of Jan. to Feb. 15 the short term trend was bearish (between the 2 orange vertical lines) but is now bullish with the +DI (green line) at 28, pointing up and above the -DI (red line) at 13 which is pointing down.

The ADX trend strength indicator (black line) is rather low in this daily chart and turning up at 22.  The long term or primary trend that would be displayed on a weekly chart (not shown here) is very bullish with the +DI at 28, pointing up, the -DI at 14 and pointing down and the ADX trend strength flat at 37 – a very bullish orientation. The ADX indicator is one of the best for analyzing trend strength and direction.

Outlook: After trading in a ” head and shoulders” pattern for 2 months, Gold has completely unwound its overbought condition.  With both the short term and primary trends looking strong,  the outlook for Gold is very bullish.