For this purpose, I am using an old but reliable indicator known as the Directional Movement Index, which is as good as any others out there when it comes to determining whether a market is in a trending phase or is moving sideways within a range.
Let's start with the Daily Chart first....
Notice, Negative Directional Movement ( the Red Line) continues to remain ABOVE Positive Directional Movement ( the Blue Line ) indicating that the bears are in control of this market. Further, the ADX line is rising indicating the presence of a STRONG TRENDING MOVE. Because -DMI is above +DMI, we know that the trend is therefore DOWN.
Let's now shift out to the intermediate or weekly time frame. There is one very noteworthy item that immediately stands out to any technician: Negative Directional Movement has been ABOVE Positive Directional Movement since late November of LAST YEAR. In other words, the Bears have had control of this market for a full year now. That is why it particularly distresses me to read so much of the foolishness that keeps coming out of some quarters of the gold community talking about such things as BACKWARDATION, GOFO rates, COIN DEMAND, etc. It makes for interesting reading and such but is of no value when it comes to interpreting the language of the gold market itself.
Furthermore, the ADX line had been steadily rising since the beginning of this year indicating the presence of a strong trending move lower until the middle of July when the line turned lower indicating a disruption in the ongoing downtrend.
As the price of gold recovered from the spike low near $1180, it rallied up to near $1420 relieving the downward pressure for a bit. However, and this is important to note, the -DMI remained above the +DMI during this time frame. That means the rally was merely a pause in the ongoing downtrend and that the bears still had control of the market.
What gives me reason for concern with gold is the fact that the ADX is showing signs of turning higher once again. It is likely, not guaranteed, that line will show a definite turn higher if gold cannot close higher this next week. Also, the market is moving down into a dangerous area. If it cannot attract the same kind of buying that it did back in the summer of this year, when demand soared higher, chart support will not be able to hold. It is imperative for this market that demand for the physical metal ramps up significantly right away or there is the danger that gold could start yet another leg down in price.
The last time frame we want to look at is the monthly chart. Something that stands out to me on this chart is the fact that the ADX has never yet ( since 2001 ) moved higher while gold was in a corrective phase lower. In other words, on the monthly chart, we have not yet had a period during which the market was in a DOWNTRENDING PHASE. All corrections lower in price were just that, corrections, not changes in the ongoing UPtrend. As you can see, the Negative Directional Movement line remained BELOW the BLUE or Positive Directional Movement Line even in 2008 when we had the debacle in the market. Bulls were remained in control of the market, even if they did just barely manage that.
However, in March of this year, for the first time since the bull market in gold began back in 2001, the Red line or Negative Directional Movement crossed ABOVE the Blue Line or Positive Directional Movement. The BEARS had seized control of the gold market. Shortly thereafter, the ADX line began to rise for the first time in over a decade while the price of gold moved lower, indicating what looked to be an incipient trending move lower. However the price recovery off of that spike low when gold moved up some $240 or so in price, dented the downtrend and the ADX began moving lower once again showing that the market was going into a consolidative phase.
Significantly, with the fall in the price of gold from $1400 to its current $1242, the ADX is threatening to turn higher once again. It is not yet there but it is certainly not falling. Translation - gold is flirting with indicating a trending move lower on the LONG term chart.
This is the reason I have been bearish on gold now for some time - the charts are indicating that bearish pressure is building in the market and is hinting at building across all three time frames. It is imperative for gold bulls that the price recovers strongly before the end of this year to prevent heading into the New Year with a strong bearish bias. Index fund rebalancing might help somewhat but with hedge funds plowing money into the short side of the gold market, Asian and middle East physical offtake is going to have to be large enough to absorb Western-based selling.
What worries me about gold is that the hedge funds still remain NET LONG, even if that position has shrunk to relatively low levels. That means that there remains more than enough firepower to take this market lower if those remaining long positions have to be jettisoned in the event of a breach of downside chart support.
Keep in mind that the first chart to respond to any upside movement in the metal will be the daily time frame. Thus we will continue to closely monitor the price action so look for any signs of a market turn higher first on that chart.
