Gold's Strong Technical Position

2009-APR-26

The outlook for gold remains bullish. Central bank 'printing presses' are running at full steam trying to keep up with those governments around the world that are spending more money than they have or are likely to collect in taxes. China's announcement on Friday that it has increased its gold reserves by 76 percent to 1,054 tonnes is yet another important piece of bullish fundamental news for gold. It is therefore not surprising that gold is in a strong technical position too, as we can see from the following chart.

This chart shows that gold remains in an uptrend. In fact, this uptrend is accelerating. Note that the green line marking the uptrend is curving upward, indicating that momentum is building.

Gold is also above its 200-day moving average, which is always a positive factor. But there is another fascinating development that needs to be considered. Gold is forming a 'head & shoulders' pattern, which can be clearly seen on the following chart that presents gold's daily New York close since the beginning of 2007.

H&S patterns normally indicate a reversal of a trend. After a long bull run, a H&S top will form to reflect distribution. In other words, buying power has been exhausted and is being overtaken by selling pressure. Prices are simply too high and cannot be sustained because they no longer represent an acceptable value.

A reverse H&S pattern (with the neckline above the head and shoulders) forms at a bear market bottom. Selling pressure is exhausted and is being overtaken by buying power, which is the result of the numerous bargains that become available at the end of the bear market.

Here is the fascinating development in gold. It is forming a reverse H&S, but gold is in a bullish uptrend, not a bear market bottom. The reverse H&S is appearing as a continuation pattern, which is very rare.

The only logical interpretation of this reverse H&S pattern is that gold represents exceptional value, as if it were at a bear market bottom. A bold interpretation would be that a 3-digit gold price will soon be an historical artifact, just like the 2-digit gold price.

Take a close look again at the chart immediately above. The neckline of the reverse H&S pattern is approximately $1,000. The left shoulder and head are complete. The right shoulder is now forming.

What's more, note the red downtrend line in the right shoulder going back to the February 2009 high. When that line is hurdled, it would be logical to expect that gold will continue higher and complete the right shoulder. The next logical step would be for gold to immediately thereafter break above $1,000.

Maybe I should say 'if' that red downtrend line is hurdled because nothing is certain when it comes to markets. But it seems that there is a high probability the red downtrend line will be hurdled soon, possibly this week. So perhaps $1,000 gold may be just around the corner.