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The emblem of Canadian Royal Mint is pictured on a gold bar at Deutsche Bundesbank during a news conference in Frankfurt January 16, 2013. (Lisi Niesner/Reuters)
The emblem of Canadian Royal Mint is pictured on a gold bar at Deutsche Bundesbank during a news conference in Frankfurt January 16, 2013. (Lisi Niesner/Reuters)

Gold suffers long-term chart damage Add to ...

Those gold traders and investors who had never paid much respect to the “technicals” or chart action in the markets got a big slap in the face Friday.

Amid no fresh, major fundamental news to prompt such, gold prices careened to a 21-month low of $1,491,40 (U.S.) an ounce, basis nearby June Comex futures, as of this writing at midday Friday. When gold futures prices pushed below the major psychological and technical level of $1,500.00 on Friday it was a “game-changer” from a longer-term technical perspective.

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On a near-term technical basis, prices dropping below solid technical support at last week’s low of $1,539.40 in June gold futures set off heavy sell stop orders to accelerate the price decline on Friday.

Gold prices are also now 20 per cent down from the all-time high of $1,923.70 an ounce, basis nearby Comex futures, scored in September of 2011. A 20 per cent decline from a new for-the-move high is considered by many market watchers to be bear-market territory.

An examination of the longer-term monthly continuation chart for nearby gold futures shows that price action a few months ago negated one accelerating uptrend line. Two others remain in place. More importantly, price action in gold just this week has pushed price below the last “reaction low” of the 12-year-old price uptrend on the monthly gold chart. That reaction low was located at the $1,525.00 area, or the December 2011 and May 2012 lows. Price uptrends in markets are defined and determined by a series of higher highs and higher lows on a bar chart. When prices drop during an uptrend and then rebound to score a fresh for-the-move high, then the low in that price decline is called a “reaction low.” An uptrend will remain in place on the chart as long as the last reaction low is not penetrated on the downside.

This week’s price action in gold took out on the downside the last reaction low on the monthly gold chart.

Trading is much to do about trader psychology. After all, the price of a market is only determined by what a group of humans reckon that price to be at any given time. Traders and investors viewed the $1,500.00 price level in gold (which is a major round number) as a very important benchmark. With the drop below $1,500.00, many of the even staunchest of gold market bulls are now throwing in the towel.

With fresh longer-term chart damage inflicted in the gold market, the next longer-term downside price objective for the bears is the $1,400.00 level (another round number). Below that is psychological support at $1,300.00.

For the beaten-up gold market bulls to begin to repair this longer-term technical damage, they will need to push nearby Comex gold futures above what is now psychological resistance at $1,600.00.

From a Fibonacci technical analysis perspective, which is a valid and respected area of chart study, the situation is not so bearish for gold.

Followers of Fibonacci consider serious chart damage to have occurred in a bull market move when prices drop below significant “retracement” levels of the previous up-trending price move. The first major Fibonacci level is 38.2 per cent and then 50 per cent, with the 50 per cent retracement level arguably being the most important. The price move from the 2001 low of $255 to the 2011 high of$1,923 sees a 38.2 per cent retracement level come in at $1,285. A 50 per cent retracement of that same move comes in at $1,088.

Another thing for the gold market bulls to keep in mind: While the longer-term uptrend on the monthly chart has been negated for now, that same uptrend could be restarted in the coming months, if prices can push back above the all-time high of $1,923.70 in nearby Comex futures.

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