Tuesday, February 8, 2011

Gold Chart Pattern: is this a good time to buy?

In last month’s analysis of gold’s chart pattern, a bearish triple-top was getting formed. A decent correction looked imminent. I had mentioned that a break below 1340 would confirm the triple-top. Gold’s price dropped all the way down to 1315 on Jan 27 ‘11, correcting about 7.5% from the Nov ‘10 top of 1421.

Since then, gold’s price has pulled back above the falling 14 day SMA, and managed to close at 1356 on Feb 3 ‘11 – a 38.7% retracement of the fall from 1421 to 1315, and marginally higher than the 38.2% Fibonacci retracement level. That may be one of the reasons why the chart is struggling a bit to move higher.

But that isn’t the only reason. Let us look at the 2 year closing chart pattern of gold to understand why:


Note that the pullback is facing resistance from the falling 30 day SMA. That opens up the possibility of a drop down to test support from the rising 200 day SMA. There is a third reason as well. The US stock markets have been bullish and investors are regaining their appetite for riskier assets.

The doom and gloom reports about the US and European economies are getting less frequent. GDP growths remain meagre, but growth is definitely more visible. Inflation remains low. Same with interest rates. That points to a further rally in the equity markets, and a correspondingly lower investor demand for safer havens, like gold.

Is the bull market in gold over? Far from it. As long as gold’s price remains above the rising 200 day SMA, the strategy should continue to be: ‘buy the dips’. Last month, I had advised new entrants to accumulate below the level of 1340. A possible drop to the 200 day SMA may provide an opportunity to add. A convincing close above 1356 can also be used to accumulate.

Please don’t forget to maintain adequate stop-losses. This close to an all-time high is not the time to throw caution to the winds. 1350 is a support-resistance level. If the support holds, gold’s price is likely to move higher – may be after a period of consolidation. A break below 1350 could lead to a test of the 200 day SMA.

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