The Technical Analysis Report: Where is gold going?

Has the worm turned?

After enjoying a spectacular upward ride for most of 2009 commodity markets have taken a decided turn downward since the middle of January.

Before looking at some of the technical indicators around the gold price specifically, let’s first examine some macro events that simply shouldn’t be ignored by even  the most steadfast technical analyst.

One of the key culprits in the downward turn in commodity price has been word that China – which had been a key driver of the global economic recovery – is looking to crimp its own torrid economic growth by clamping down on lending.

The resistance of the Chinese economy to the global downturn and its 8% growth over 2009  fit nicely with the view that loose monetary policies in developed nations would bring on an inflationary environment. Those two beliefs had been behind market support for the surge in commodity prices.

But with the Chinese government threatening to curb growth through tighter monetary policy and lower than expected Consumer Price Index (CPI) readings here at home, that storyline has come under attack.

Indeed Bank of Canada governor Mark Carney said that inflation has been so well checked in this country that rates can safely remain at record lows until the middle of the year.

Zeroing in on the gold market, another bearish fundamental indicator can be found on the demand side.

The fourth quarter of 2009 saw one of the steepest declines in gold jewellery demand in recent history, as higher gold prices helped cut demand by 32%.

While institutional investment (largely through ETFs) in the yellow metal has become an increasingly important factor on the demand side, jewellery demand is still considered a strong determinant of the gold price.

So within this changing environment let’s examine some technical indicators.

Bollinger Bands

The Bollinger Bands are indicating that gold is oversold as prices are touching the bottom boundary of the bands. This is considered bullish, although bollinger bands should never be used in isolation. They must be supported by other technical indicators to have true merit.

Weighted Moving Average

The 20-day weighted moving average indicates bearishness as the price has fallen below the line. The price however remains above the 200 day moving average line.

Fast Stochastic

The SlowK line crossed below the SlowD line which is a sell signal, although the lines are in the oversold range which means a short term reversal could be imminent.

Slow Stochastic

While the indicator does look like it is defining a bottom, caution must be used. Stochastics are much better at showing short term bottoms if we are in a well established up trend. Given the current sideways to downwards trend this indication is less reliable.

RSI Indicator

RSI is in neutral at the 40 point level, although it s over all trend is down towards the oversold mark of 20.

ADX Indicator

The ADX line measures the strength of the prevailing trend. A rising ADX indicates a strong underlying trend while a falling ADX suggests a weakening trend which is subject to reversal. Currently the ADX is rising.

The line had been rising with the price of gold until the end of November when it fell drastically. Since the middle of January, however, the line has been rising. A somewhat disparaging signal for gold bulls, as a rising ADX line when prices are trending down indicates that the downward trend is strong.

DMI Indicator

The DMI+ line being underneath the DMI-, indicates a downward trend. A buy signal would be generated when the DMI+ line rises and crosses the DMI- from beneath.

MACD

While the MACD line is in bearish territory – since it has crossed the signal line from above and is trending downward – be watchful. When the MACD line loses its downward slope and begins to arc up towards the signal line it is often the best time to buy.

Williams’s %R

The Williams %R line offers a glimmer of hope for those looking for a bottom. The line is down in the oversold range which is a short term bullish indicator. It should be noted, however, that in a bearish market, the line can stay in the oversold range for an extended period of time.

Overall technical indicators are painting a rather bearish picture. There are, however, some signs of a short term bottom. Investors must be very nimble in such an environment. Even if price was to begin to climb again, it could only be a short term correction in an overall bearish trend.