Gold is in a contraction phase, both in terms of price action and momentum and we feel that this condition will not last much longer. Looking at the chart of Gold Futures and applying the basic tenants of Technical Analysis, we make the following observations:
Trend State: Gold is in an longer term uptrend as it is trading above its 200DMA (not shown).
Price Pattern: Gold has traced out a symmetrical Head and Shoulders pattern and shorter term it is sporting a bearish flag (bear continuation pattern). Therefore, as it stands, the uptrend may be in danger, if these bearish patterns are validated. Price below $2023.8 validates the bear patterns, price above $2086.5, voids these patterns and a challenge of ATH a great possibility.
Volume: Overlaid on Price is our own Volume Bars indicator. From the colour coded price bars (bright green = above average up volume, bright Red = above average down volume). The right shoulder of the H+S pattern was formed with above average down volume, which is encouraging to the Gold Bears.
Momentum: We are using a 14D RSI with Bollinger Bands overlaid in order to gauge momentum. RSI is conveying a neutral momentum state and the Bollinger Bands are narrowing. So momentum is building up force and could be riding the bands soon.
Volatility: The ‘Squeeze’ indicator at the bottom of the chart is conveying that we are in a volatility contraction phase, so we need to be prepared for an expansion phase soon.
Chart 2 below shows, the Gold Bug Index – HUI with the prices of the GLD and GDXJ (Junior Gold miners ETF). We use this chart configuration in order to see if there are any clues that may help discern Golds next price move, as Commodity related stocks move most of the time first before their underlying commodity due to the inherent leverage nature that exists in those stocks. Both HUI and GDXJ have established a downtrend and have temporarily de-coupled from GLD. Given the bearish technical setup in the Gold chart above , chances are that Gold may soon start breaking lower.