Some Chart Analysis on Gold

In light of the recent apparent reversal by Fed Chairman Ben Bernanke when it comes to the timeline for any TAPERING of the Fed's Bond Buying program, affectionately known as "QE" for short (I like to think it stands for QUICK and EASY profits for Wall Street), I felt it might be a good idea to take a look at where gold stands on the technical price charts.

Let's start off with the Daily Chart only as I am pressed for time but wanted to get something posted for the readers. Note also I am using an old but very reliable technical indicator known as the Directional Movement Index. I like this index because it is basically a trending indicator. It is thus very useful for determining whether a market is in a TRENDING pattern or whether it is in a sideways or NON-TRENDING pattern.

A quick primer on this indicator is therefore in order before proceeding - it consists of THREE lines; two of them are DIRECTIONAL INDICATORS ( +DMI and -DMI ); the third is the TRENDING INDICATOR ( ADX ).

You can see those noted on the chart. The +DMI or positive directional movement indicator is the blue line; the -DMI or negative directional movement indicator is the red line and the ADX is the dark purple line.

When prices are moving higher, the +DMI will move higher and the -DMI will move lower with the result that +DMI will BE ABOVE -DMI.

When prices are moving lower, the -DMI will move higher while the +DMI will move lower with the result that -DMI will be ABOVE +DMI.

If the blue line is rising therefore and remains above the red line, the price is rising.

If the red line is moving higher and remains above the blue line, the price is falling.

That takes some getting used to among those new to using this indicator but once that is understood, the direction of price is very easily seen by a quick glance at the respective lines.

The third indicator, the ADX (purple line) will rise whenever a market is in a trend and fall when the trend is ending. When the market is moving sideways or is trendless, the ADX will move lower until a new trend emerges (either up or down; it doesn't matter) when the ADX will begin to rise once more.

When a market is in a strong uptrend, you will have the +DMI moving higher with the -DMI moving lower  with the +DMI remaining ABOVE the -DMI. You will also have the ADX rising.

When the market is in a strong downtrend, you will have the -DMI rising with the +DMI falling with the -DMI remaining above the +DMI. You will also have the ADX rising.

That being said, look at the chart and see if you determine whether or not gold is in a trend and if so, what that trend has been, up or down? If you chose DOWN, you win the stuffed animal prize.

Can you see how the red line crossed above the blue line back in November of last year? That was your sell signal in gold. It was also an early warning of the impending break of downside horizontal chart support at the critical $1680 level.

Note at that time the ADX was down below 15 indicating the lack of a trending move as it had already turned lower upon the inability of gold to clear $1760. The downside crossover of the blue line  ( +DMI ) below the red line ( - DMI ) was a warning to bulls to book profits or at least protect profits, not necessarily go short.

From the point of the upside crossing of the red line above the blue line in November, this market was to be traded from the short side notwithstanding all that claptrap about gold backwardation, etc.

Now look at the ADX during the time inside the rectangle. You can see that gold was making up its mind whether to continue moving sideways or break lower. The ADX was not moving higher but was stuck in a sideways to lower pattern between 20 and 15 indicating the lack of trend. Once the price broke down below horizontal chart support at the $1640 level, the ADX began to turn up and cleared the 20 level indicating that a downtrend was forming. Note all the while this is occurring, the red line remains above the blue line. Negative directional movement is dominating the chart. This means one DOES NOT BUY no matter what the various headlines some in the gold community were posting on their websites.

From that point on, the ADX continues rise with a few brief periods of mild dips in it before it goes on to rise to new highs. It is now turning down from a very lofty level up near 45 which indicates there is currently a PAUSE in the downtrend, a downtrend which I might add has been very strong and very long in the tooth.

However, while the red line is moving lower and the blue line is moving higher, the fact remains that the two directional lines have NOT CROSSED. What this means is that from a pure chart perspective, the current move higher in gold is nothing more than a rally in an ongoing bear market.

For this market to change complexion, I will need to see an UPSIDE CROSSOVER of the +DMI or blue line ABOVE the -DMI or red line. Keep in mind that because the downtrend in gold has been of such great extent and duration, the ADX will continue to move lower for a while even if price continues to ascend further. A way of interpreting this in English is to say that it will take quite a move higher in the price of gold to REVERSE the downtrend AND SIGNAL the start of a NEW UPTREND.

Remember, a market can end a trend without necessarily beginning a new trend in the opposite direction right away. By the way, have you noticed that DESCENDING 50 DAY MOVING AVERAGE? It is still some $80 or so ABOVE the current price so until or unless that average is cleared, bottom calling is ill-advised. Only short term, TRADEABLE BOTTOMS, are justified but those mean exactly what I stated, "SHORT TERM". I am attempting to illustrate here what the inputs are that are required before I personally will feel comfortable saying we have a MORE LASTING BOTTOM in gold. Perhaps we already do - then again, perhaps we do not. At this point this chart does not confirm a lasting bottom only a pause in an ongoing downtrend in the metal.

Lastly, the variables that one chooses to set up the indicator determine how quickly it will turn and give off trading signals. When it comes to gold, I prefer to use a bit longer than normal timing factor so as to weed out some noise and prevent false signals. This is however the daily chart. This same indicator can be used on all time frames down to 5 minutes if you want although I think the usefulness is pretty much over once you move down any shorter than a two hour chart to be honest.

I wish you readers to know that the reason I am writing this article is to help you to learn to think and trade or invest for yourselves and not be moved by every headline or the latest gold community buzz word or theory. Most of the people who write those websites ( not all of them)  make their livings by selling ads on them based on the number of hits. They have a vested interest therefore in generating as much website traffic as possible as it increases their monthly checks. Those of us who actually make our living IN THE MARKET, have no such luxury but must be prudent. One can find experienced traders and one can find reckless traders but one will search in vain for EXPERIENCED AND RECKLESS traders. There are no such creatures as any of the reckless ones have long ago become road pizzas on the trading floor of the exchanges having failed to survive as Traders long enough to actually have gained enough experience to know what the hell they are prattling about.

One more reminder, this is not a Holy Grail of an indicator. It is just one of many that I use in my tool box. Some are more responsive; others less so. But what I try to do is to use is several trusted indicators to develop a consensus and then tie those in to various support and resistance levels including Fibonacci retracement levels to determine how to approach a particular market. Along those lines you might want to check in with my friend, Trader Garrett, whose website is listed in the favorites section over on the right hand side of this blog. He is also a veteran trader and both of us share the same philosophy when it comes to putting our hard-earned capital at risk in a market. Neither of us are given to sensationalism. Hard nosed realism is the key to survival if you are going to trade in these markets.

Keep in mind an old axiom of mine that sums up how I feel about the need for humility. Opinions are like armpits. Everyone has two of them and they all stink. The only opinion that ultimately matters is price action and whether or not you are on the right side or the wrong side.