(This is an excerpt from Friday's blog for Decision Point subscribers.)
Gold made new all-time highs on Tuesday, seemingly reinforcing all the hype we have been hearing and reading about we really, really need to own lots of gold. Actually, I don't entirely disagree with that point of view, but the charts are giving evidence that the price of gold is topping, and that it may fall to more favorable levels to begin accumulating gold or adding to current holdings.
Looking at the daily chart of closing prices for NY spot gold we can see that a rising wedge has formed. This is a bearish formation because it normally resolves to the downside, meaning price drops down through the bottom of the wedge. Supporting this expectation is the fact that the PMO (Price Momentum Oscillator) topped on Thursday, and the PMO has made lower highs compared to higher price highs, forming a negative divergence. The daily PMO has topped, suggesting the possibility of a short-term price decline.
The rising wedge can be seen on the weekly chart, and the weekly PMO shows a longer-term negative divergence. The PMO topped as of Thursday, but, since this is a weekly chart, none of the readings become "official" until the last day of the week.
The most useful aspect of this chart is for estimating possible support levels in the event that price does in fact decline a significant amount. The most obvious support level is at 1000, which was previously a resistance level, preventing price from rising above 1000. (Resistance, when penetrated becomes support.)
The next price support will be on the rising trend line, which currently intersects about 880; however, assuming a decline lasting several months, it is probable that the horizontal support line at 1000 and the rising trend line will intersect at about the time price has declined to 1000, so there will be very strong long-term support at that level if that occurs.
The monthly chart emphasizes how steep the advance has become, and a correction back to a less accelerated rising trend line would be a healthy development.
Bottom Line: Gold's advance from the July low has been slow and labored, and the bearish rising wedge formation implies that a correction should take place. How much of a correction may happen is hard to guess, but the maximum I would expect would be down to about 1000. That would also be an optimum correction because it would take some of the froth out of the gold market and set a more sustainable rising trend angle.
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Technical analysis is a windsock, not a crystal ball.
