Gold (daily chart) as of Wednesday (10/12/2011) has continued its struggle to recover from the precipitous drop that brought price down from its latest all-time high of 1920 in early September down to a low of 1532 in late September. That three-week plunge of almost $400 culminated in a large hammer candle right down at the 200-period simple moving average support, indicating a temporary price failure to further its plummet. Since that candle formation, price has essentially consolidated sideways with a slight upside bias. This pullback/consolidation has formed a rising wedge-type pattern that may also be seen as a large pennant formation. This consolidation pattern would fulfill its role as a continuation pattern if there is a break to the downside below the bottom border of the pattern. In this event, the key initial downside target resides around the 1550 price region. The key event that could presage a recovery of gold and a potential resumption of the long-term entrenched uptrend would be a breakout above the 1730 resistance region.
(Click on chart to enlarge. Forex chart key: price on 1st pane, Stochastics 14,3,3 on 2nd pane; horizontal support/resistance levels in black; uptrend lines in green; downtrend lines in red; 50-period simple moving average (SMA) in orange; 100-period SMA in brown; 200-period SMA in dark blue; Fibonacci levels in magenta.)
James Chen, CTA, CMT
Director of Technical Research and Education