Has Gold Bottomed?

12/28/2009 10:59 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

It has been a rough month for gold, as after the December 3 intraday high on the February contract at $1227.50, the selling has been quite heavy, taking gold to a low of 1075.20. In this December 7 article, we reviewed the technical studies to determine the long-term significance of gold’s recent reversal, concluding that while a short-term top was likely in place, the intermediate-term trend was still positive. Now that gold has dropped $150 and reached the initial retracement support zone, it is a good time to review the technical outlook from the monthly down to the hourly charts.

Figure 1

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Recently, I featured this monthly gold chart with the OBV to illustrate that even with a lower close in December, the OBV was confirming prices, indicating that a major top was not in place. The OBV is one technical study that has worked very well on gold, especially since 2002, as it has led prices higher. Looking at the OBV historically, I believe should be helpful to many traders as it does work well in most markets. In November of 2004, line 1, gold and it’s OBV both made convincing new highs, showing no divergences. Gold closed lower the following month and began a several-month corrective pattern, but by the third quarter of 2005, the OBV was again making new highs. The OBV peaked in March 2006 (line 2), but gold made significantly higher highs in April before reversing to close the month lower. Gold corrected sharply the next month, but held above the 61.8% retracement support and traced out a 13-month triangle formation. By early 2007, and before the triangle was completed, the OBV was already making new highs, leading gold prices by several months. Gold completed its continuation pattern in September 2007 and the OBV made a series of new highs before peaking in February 2008, line 3. Gold prices topped the following month, and during the following eight-month correction, the OBV held up very well, staying above its WMA and keeping the longer-term analysis positive. Further new highs were made in early 2009, line 4, giving plenty of advance warning of gold’s recent surge. Though several of our Fibonacci targets were hit in November, the 161.8% projection, using the decline from point a to b, is at $1252 and has not yet been met. The OBV will turn down this month, but it is well above its WMA. So how much longer can this correction last?

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Figure 2

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In order to answer this question, we should first look at both the weekly and daily OBV, both of which confirmed the December 3 highs. The weekly OBV has just dropped below its rising WMA, which in an uptrend often marks the end of a correction. Therefore, the daily and weekly analysis suggests that the correction may be more brief than many seen over the past eight years. The daily chart shows that February gold has dropped just below the 38.2% support at 1092 as the low so far has been 1075. The more important 50% support lies at 1050, while the major 38% support, calculated from the November 2008 lows, is at 1010. This is also an area of important chart support. The RSI3 formed a slight negative divergence at the recent highs, line a, and is now trying to bottom below 30. A close above 1121 should move the RSI3 back above the 40 level and confirm the short-term bullish divergence, line b. The RSI3 should then rally back to the 55-65 area (dashed lines) where it will need to be watched closely. If the RSI3 turns lower from this area and drops below 50, it will make a test of the lows more likely.

Figure 3

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The hourly chart of the Spyder Gold ETF (GLD) shows that it has bounced from the 105 area and support going back to October. GLD closed just below the minor resistance at 108.50, and there is additional chart resistance at 110. The 38.2% resistance level is at 110.75 with the 50% level at 112.50. For February gold, the 38.2% resistance is at 1133 with the 50% at 1151.

Though the recent lows could still be tested or slightly broken over the short term, the recent action indicates a tradable low is now being formed. If this is the case, a rebound should at least test the 38-50% resistance zone, but I feel that more backing and filling will then be required before gold is ready to challenge its recent highs. Once we get a rebound, it will give us some more information to derive additional Fibonacci projections. Over the next three to six weeks, I would expect gold to form a continuation pattern (possibly a flag formation) before the 2009 highs are challenged. Such a trading range should provide many opportunities for short-term traders, but will be more difficult for those holding intermediate-term positions.

By Tom Aspray, Trading Lessons editor, MoneyShow.com

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