BullMarketRun.com

John: On Friday, Gold (continuous contract) opened at $1,374, climbed to a high of $1,378 and then fell to a low of $1,355. It closed at $1,359, down $13.80 (1.00%). Of course at BMR we focus intensely on the price of the yellow metal which is also a common element with most of the companies we write about.  We have periodically studied this commodity and its relationships with the CDNX, the TSX Gold Index and the U.S. Dollar.  Today we analyze the history of the Gold price over the last 4 years in terms of technical analysis to look at trends, patterns and examine the direction for the next 6 months. To do this I’ve used a monthly chart which eliminates the daily and weekly noise and presents a clear image of the “Big Golden Picture”.

Looking at the 4-year monthly chart we see that in July, 2007, a 10-month flagpole began which took the price from $650 per ounce to over $1,000.

Then an 8-month corrective phase began which took the price down slightly below the $700 level during the Market Crash, almost a 100% retracement.

In November, 2008, the price recovery began with Gold moving up to $1,000 in 4 months.

Starting in February, 2009, Gold began to form a consolidation pennant which lasted for 6 months.  This tended to put more order into the Gold market and in September, 2009, the price broke to the upside from the pennant and continued to climb until a big move came in November, 2009, and into early December, when Gold hit an all-time high of just over $1,200 per ounce.   This created an overbought situation which in turn caused a retracement.

In February, 2010, we saw the start of the first 6-month cycle. The price bottomed at $1,050 and rose to over $1250 by June, 2010, before retracing to $1,150 in July.

In August, 2010, we saw the start of the second cycle with the high occurring in December, 2010, at the $1,425 level.  Then here in January, the 6th month of the cycle, the price is retracing with a solid support level at $1,300 as shown on the chart.

As can be seen from the chart the trading between February, 2009, and now has formed an upsloping channel. In November and December, 2009, when the price broke above the top of the channel this can be considered as an “outlier” and unimportant in our analysis. I have extended the 4-year chart for another 10 months in order to extrapolate the upsloping channel and be able to estimate the price in June of this year, assuming Gold will continue to move within the channel in a similar 6-month cycle. The predicted high from the extrapolation is $1,650 per ounce while the strong support level at the bottom of the channel for January is $1,300 (green dotted line).

Looking at the indicators:

I have used the RSI(2) which is suitable for extreme situations (highs and lows). The price highs usually occur at the 100% level and the lows around the 30% level. The span between 30% and 100% can be considered a bullish trend and if the span is between 0% and 70% the trend is bearish. The present RSI level is 37% and moving down towards 30%.

The ADX trend indicator is very bullish with the +DI (green line) at 32 and above the -DI (red line) at 17. The ADX trend strength (black line) is strong and climbing at 50, a very bullish orientation.

Outlook: This analysis shows there’s a high probability that Gold will continue to trade in the upsloping channel and will not fall below the $1,300 support level.  A realistic 6-month high appears to be $1,650 per ounce. The primary trend in Gold is very strong.