(Kitco News) - It's been a good start to the year for gold, with the market up nearly six percent in the past month. Uncertainty over the state of global growth, equity market volatility and general safe-haven demand have supported solid gains in the gold market.
Technically, the chart picture has improved significantly in recent weeks. Let's take a look at 6 questions that technical traders monitor when analyzing a chart picture.
- What is the trend?
In the short-term, the trend is bullish. A small "double bottom" pattern developed on the daily chart off the Dec. 3 and Dec. 17 daily lows (marked at points A and B) and the subsequent rally and close above the intervening high at the Dec. 4 high (marked at point C) confirmed a minor bottom on the daily chart.
A pattern of rising daily highs and rising daily lows is seen out of that minor double bottom pattern, which is a bullish short-term trend signal.
- What do trend following indicators show?
They have confirmed the short-term rally. Trend indicators, such as moving average lines, tend to be lagging indicators (based on how they are calculated.) But, indeed the moving average picture has shifted to positive in recent weeks. April Comex gold futures are now trading above their 20-day, 40-day, and 100-day moving average lines, which is a positive signal for the trend following crowd.
- What does momentum show?
Daily momentum is generally rising and positive. The 14-day relative strength index has been climbing in a choppy manner in recent weeks. On Monday, the 14-day RSI hit 63%. The 70% line is considered the traditional "overbought" reading. As the market approaches the 70% zone upward price momentum could begin to slow.
- Where does gold see resistance now?
The 200-daymoving average is strong overhead resistance of the gold market. The 200-day moving average comes in at $1,134.90 basis April gold futures. That line has largely capped rallies in recent months, and a brief break above that zone in October was short-lived.
- What can traders expect now?
Gold is vulnerable to a consolidation phase as the market approaches major long-term resistance at the 200-day moving average line and daily momentum indicators approach overbought levels.
- What level is important to watch on the downside?
Initial support lies at $1,108.50, the minor swing low formed last week. In the very short-term, that floor needs to hold firm to keep the focus on higher prices. A decline below initial support would suggest a corrective phase was taking hold.
Bottom line? The near-term picture for gold is positive. Technical indicators hint the market may be vulnerable to a short-term consolidation phase, but the near-term trend pattern gives the bulls the edge. It would take a strong and sustained upside breakout above the 200-day moving average line to really open up the topside for gold with a major target at $1,184 and then $1,191.90, daily highs from October. The recent stair step rally mode suggests the market is not in a strong breakout phase. Use caution in the short-term as gold bulls may need a rest.
By Kira Brecht, contributing to Kitco News;
Follow her on Twitter @KiraBrecht
