Has Gold Topped Out?

12/07/2009 10:56 am EST

Focus: FUTURES

Thomas Aspray

, Professional Trader & Analyst

Friday’s trading in gold was wild as the rally in the dollar caused a rush to the exits as the February 2010 gold futures had a $66 range. Though gold did close $22 above the day’s lows, the market was definitely rattled, and I am sure this was a tough weekend for many of the gold bulls. The technical studies for gold have been pointing higher for some time, but after such a dramatic rally, what are they saying now?

Figure 1

chart
Click to Enlarge

The monthly OBV on gold (not shown) has been leading prices higher since 2002 and was last discussed in this chart analysis on October 1. The monthly OBV will likely confirm this month’s high even if gold closes lower, and this indicates that the long-term trend is still positive. The weekly chart shows that the OBV has also continued to make higher highs, keeping the intermediate trend positive. In this Trading Lessons article, we said “Once above the 2008 highs, the first upside target is at $1130 (127.2%) with the 161.8% target at $1252. If this level is overcome, then we have the 423.8% target from the 2006 correction at $1332. Later in the year, an additional target at $1185 was added, as was $1310, which is the 161.8% projection using the rally from the July 2007 lows to the March 2008 highs. So far, the high basis the February 2010 contract has been at $1227. A lower close during the week ending December 12 would suggest a deeper correction, but in my view, would not change the positive intermediate-term trend.

Figure 2

chart
Click to Enlarge

The daily chart of the February 2010 gold contract shows the wide range on both November 27 and December 4. I have also added the starc bands, developed by the late Manning Stoller, which I have written about previously. Traders will remember that when prices are near the upper bands, it is a high-risk time to buy, and conversely, at the lower bands, it is a high-risk time to sell. Gold closed on the upper weekly starc bands a week ago and pushed above it during the week. On Friday, gold came within $12 of the upper daily starc band and tested the lower daily starc bands, all during the same day. There is support at $1130-$1135, which, if broken, will indicate a decline to the 38.2% retracement support at $1108 and a retest of the breakout level. A close below this support will make a drop to the 50% support at $1070 more likely.

In summary, more selling this week will suggest a deeper and more complex correction that could last several weeks. Therefore, last week’s highs may not be challenged over the near term, but should be exceeded over the intermediate term. The price action early this week will tell us more as it will take a close back above the $1200 level (basis February contract) to reassert the uptrend. I would not be surprised to see several wide-ranging days, but if they fail below the $1200 level, it would turn the analysis more negative over the short term.

By Tom Aspray, Trading Lessons editor, MoneyShow.com

Related Articles on FUTURES