Whenever possible it is best to look at a price index in long-, medium-, and short-term time frames. For me that means analyzing monthly, weekly, and daily bar charts.
(This is an excerpt from the October 21, 2011 blog for Decision Point subscribers.)
First, let's look at the monthly chart for the big picture. In August gold hit the top of a parabolic blowoff, and a September correction took back all of August's gains. As a consolidation began in October, we can see that support is possible on two fairly steep rising trend lines. If we had the opportunity to choose one, the line on the far right would be the best to restore a more normal rate of ascent. The best horizontal support is at 1000.
Next we zoom in on the weekly chart, where we can see the blowoff and correction in better detail. Price has found support on a short rising trend line that is related to the accelerated move up to all-time highs. My assumption is that the line will not hold, and that prices will correct to at least the rising trend line drawn from the 2008 lows, about 1500. That would be a correction of about 25%, and a good point to resume a more orderly advance.
Finally, we zoom in on the daily chart, where we can see price being squeezed into the apex of a triangle. The 20-EMA is below the 50-EMA (medium-term neutral), and the PMO has just topped below the zero line and its 10-EMA (short-term bearish), so my guess is that the tirangle will resolve downward.
Bottom Line: As of 10/3/2011 gold is on a Trend Model Neutral signal (in cash or fully hedged), but the 50-EMA is still above the 200-EMA, so gold is bullish long-term. After a blowoff top in August a much needed correction is in progress. A logical downside target based upon a four-year rising trend line is 1500. Of course, a major change in the drama coming from the EU could override our technical expectations, but it is interesting that the price of gold has been in decline even as the situation in the EU has become even more critical.
