Can Gold Still Go Higher?

Many analysts turned bearish as gold prices drifted lower after peaking in December 2009. By the latter part of February, quite a few traders and analysts were convinced that gold had made a significant, if not an all-time, high. Traditional chartists will tell you that this is what happens during a continuation pattern as the sentiment declines from an extreme level, and this creates the necessary environment for the major trend to resume. With gold and the other precious metals up sharply, I wanted to follow up on the technical picture as well as the key Fibonacci levels investors and traders should be watching.

Figure 1 - Click to Enlarge

The monthly chart above is updated through May 14 and shows that the 161.8% extension target using the correction from point b to c has been reached. The 161.8% extension target using the rally from point a to point b is at $1475 as the 100% target at $1180 was already met. Over the past few years, I have referred often to the on-balance volume (OBV) on gold, and I thought a closer look at how it has acted over the past few years might be helpful. After peaking in early 2008, gold corrected for most of the year but then turned higher in October. With the higher monthly close in November 2008 (line A), the OBV completed its continuation pattern by breaking through resistance at line 3 after a successful test of its uptrend, line 2. Gold prices did not break out until the end of December (line 1), and this is the type of leading action I often see with the OBV. Gold peaked in February, and even though it did not make new highs based on the continuous contract, the OBV did make new highs. For the next six months, gold stayed in a $65 range, but turned and closed above resistance, line 4, in August. The OBV overcame its short-term downtrend, line 5, and was soon making further new highs again. The monthly OBV made new highs in November, confirming the price action. On the ensuing correction from these highs, the OBV dropped slightly below its WMA (point 6) and support at line 2. The volume needs to be quite strong for the rest of May in order to push the OBV to new highs.

Figure 2 - Click to Enlarge

The weekly OBV also confirmed the December highs, and while it is above it's WMA and looks positive, it is still well below the previous highs. In my experience, this is not enough to change our view on the intermediate trend, but a break below the Febraury/March lows would be negative. From the weekly chart, we can determine two additional Fibonacci targets. By using the rally from point a to point b and measuring up from point e, it gives us a target at $1362 and also coincides with the upper parallel trading channel. The 100% projection, or equality target using the rally from c to d, gives an additional upside target at $1407. On the weekly chart, I have also plotted the starc bands in green. Developed by Manning Stoller, the simplest interpretation is that when prices are at or near the upper band (starc+), it is a high-risk time to buy and a lower-risk time to sell. Conversely, when at or near the lower bands (starc-), it is a high-risk time to sell and a lower-risk time to buy. I have circled several points to illustrate this. In November 2007, the upper band was exceeded, and gold then moved sideways to a bit lower for the next six weeks before the uptrend resumed. In March 2008, gold rallied close to the starc+ band before reversing to close lower. Between August and November 2009, prices tested or exceeded the starc- bands before changing direction. The starc+ bands were also exceeded last December as gold was peaking. Last week's highs at $1249 were not far below the starc+ band at $1265, and this may mean that gold is ready to consolidate for a few weeks.

NEXT: Daily Gold Chart and Timely Look at Gold ETF

Figure 3 - Click to Enlarge

The daily chart of June gold shows the four-month correction, which eventually retraced just over 50% of the rally from point a to point b. The move through resistance in the $1172 area, line 1, was preceded by the OBV as it overcame the resistance at line 2. The daily OBV continues to look strong, but it is distorted somewhat by the rollover from the April-to-June contract. The 127.2% extension from the point b-to-c correction is at $1280 with the 161.8% target at $1348. Basis the June contract, a rally that was equal to that from July 2009 to the December 2009 highs is at $1364. Even though the rally in gold has been impressive, it does not look parabolic, despite what you might hear on TV. A parabolic move is what happened in 1980 when gold went from $350 to over $850 in ten weeks! Though most are watching the $1200 area for support, I would not be surprised to see a pullback to the $1175-$1190 area with the 38.2% support currently just above $1170. The most likely upside targets, in my opinion, are in the $1348 to $1362 area.

Figure 4 - Click to Enlarge

The heavy volume in the Spyder Gold Trust (GLD) confirms that it is the primary vehicle for many traders and investors. Even though I was also a bit impatient for the correction to be over (they always take longer), our targeted area worked out well as on January 27, we were looking for a drop from $106.50 to either $104.90-$105.30 (38.2% support) or $102.30-$103 (50% support). The low a week later came at $102.28. The hourly chart still looks positive and shows no signs yet of a significant top.

Figure 5 - Click to Enlarge

The daily chart of GLD shows the completed triangle formation, lines 1 and 2, which has upside targets at $127. The 127.2% extension target from the December-to-February correction is at $124.40 with the 161.8% target at $130.40. If the rally from the February lows is equal to the rally from the April 2009 lows to the December 2009 highs, the 100% projection target is $133.30. There is minor support now at $117 with the 38.2% retracement support is at $114.75. The 50-day MA and the more important 50% support level are in the $112-$112.75 area. The next likely upside target is in the $124.40-$128 area.

NEXT: Don't Forget About Silver and Platinum

Figure 6 - Click to Enlarge

Silver's December 2009 high coincided nicely with one of our Fib targets and the decline into the February lows just slightly exceeded the 38.2% support level. The 127.2% extension target from this correction is at 2076, as is the 100% target using the rally from point a to b and measuring up from point e. The 161.8% target is at 2244, and this is just above the equality target using the rally from point c to point d. As silver is still lagging, the most likely target is in the 2244 area, which also corresponds to the upper parallel trend line.

Figure 7 - Click to Enlarge

The first thing you will notice about the weekly platinum chart is that there has been no significant pullback since the summer of 2009. The correction from the highs in early December 2009 retraced just a bit over $140, but by early January, was sharply higher as it reached the 100% equality target at $165. This was determined by using the rally from point a to b and measuring up from point c. The starc+ band was also reached early in the week before platinum reversed to close lower. The major 61.8% resistance level from the 2008 highs has recently been overcome. The 161.8% extension target using the point a-to-b rally is at $1989, which also corresponds to the band of chart resistance at $1956 to $2234. The steady nature of the uptrend from the 2009 lows does not yet suggest a top is being formed. The weekly technical studies are positive as the OBV moved through resistance, line 1, in November 2009 and continues to make new highs. The WMA on the OBV is rising nicely and the OBV is in a solid uptrend, line 2. There is good support now between $1574 and $1654.

As we publish today's lesson, the metals have softened a bit, but the technical studies still show no signs yet that the rally is over. Therefore, we would expect to see a corrective period before the uptrends resume. We will keep monitoring the metals and would advise keeping an eye on platinum for any signs that it is giving up leadership, because that would be a negative sign.