The Short and Long-Term Outlook for Gold
The Long-Term Outlook - Yearly Time Frame... Technical Analysis (TA) is the study of price trends and volume over various time frames. I strongly believe that in order to make high confidence investment decisions it is vital for you to first consider long term TA charts. No matter what investment instrument you are looking at, always look at the longest time frame chart FIRST in order to gain proper perspective. So, assuming there is enough data in the series, start with yearly price plots, then quarterly, monthly, weekly, daily and finally intraday. Having said that, take a look at Chart 1 below. It is the yearly price of gold chart (each price bar represents one year) going back to 1970 to present day July 18, 2002.
In my entire 7 years looking at stock price charts I would have to say that Chart 1 below is surely one for the history books. Why? There are a number of reasons. First, note that Chart 1 is plotted on a YEARLY scale. You must wait an entire year just to plot another price bar on the chart! This implies that the oscillator plotted in the upper half of chart one is also only affected just once per year. Clearly this chart has some long-term implications. If you are somewhat familiar with Technical Analysis, then you know that when an oscillator breaks out up above the 20th percentile line, it issues a buy signal. The stochastic oscillator is good for identifying shorter-term buy and sell points along a major trend. However, in the much longer yearly time frame below, it is indicating a new bull market!
Also to note in Chart 1 is the very large 'falling wedge' price pattern. This falling wedge is over 22 years long. It is a curious and yet fascinating point that price chart patterns appear in all time frames, from 5 minute bar charts to 22 YEARS. This is a bullish price chart pattern and implies prices will eventually break out above the long 22 year overhead resistance line. Note the two yellow circles on the chart, one directly at resistance on the price portion of the chart, and the other directly at resistance on the oscillator portion of the chart. In order to speak with utmost confidence that gold is in a new bull market, prices will need to make a yearly close above that yellow circle. This will bring the oscillator above its yellow circle as well, confirming the move.
Quarterly Time Frame - Often at the end of a falling wedge price pattern formation you will see some form of a double bottom form. It is not clearly visible in the yearly chart, but is evident in the quarterly gold price chart below (Chart 2). Notice that this is a 2.5 year double bottom, giving it greater significance. You can also see the downtrend line, which in Chart 1 made up the top portion of the falling wedge price pattern.
Aside from this downtrend line resistance there is also the 330 level of resistance, which is the level that we most recently have pulled back from and tested which was to be expected. This 330 level long-term resistance was also tested without success in the 1999 - 2000 time frame. This makes sense given the excessive supply that has been sitting at this level for many years now. Assuming the 330 level will be successfully broken through, the next most significant resistance will be in the 360 to 380 area. Price behavior at these levels will be giving very important indications about the future price of gold since a sustained move above this level would indicate that the long term 22 year resistance has been broken (i.e. New bull market territory)
The last important thing to note about Chart 2 is that the period 1998 - 2002 has been an area of the chart where the price of gold is 'building cause' to attack and move above the long term resistance line. It is not visible in Chart 2, but in the most recent 6 months a tremendous amount of volume has been building under this resistance area. This is paramount in order for Gold to get the 'escape velocity' necessary to break the long-term 330 resistance level. The best analogy I can think of is a pressure cooker. The volume is the steam and it is rising in temperature eventually causing the cover (330 resistance line) to blow off.
Once Gold Bulls are able to take prices above 330, they will feel vindicated and are likely to move the price of gold much higher in a shorter time frame, possibly even creating a gap up in prices. After looking at hundreds of charts over the years I have seen these types of prices moves time and time again. For example during the blow off stage of 1999 in the Nasdaq, there were many low priced small stocks that had been sitting under resistance lines for many years. Once they were able to break these resistance lines, prices moved sharply higher with little pause.
The Short Term Outlook - Now that you have the longer term perspective, lets zoom in and see what is happening in the past year in Gold (Chart 3 May 14, 2001 to July 18, 2002). As you might expect, the price action is looking very bullish indeed. Consistent up trends followed by orderly pullbacks resting on support. If you were to look back at the beginning price action in the Dow or Nasdaq in 1982, the year the bull market started, you will see similar price action.
Note that if you closely examine the volume portion of Chart 3 you will see throughout the past year lower volume on pullbacks and higher volume on breakouts. There are symmetrical triangles, rectangles and as I have pointed out in Chart 3 below bullish FLAG patterns. These are the patterns that bull markets are made of!
Focus in on the two flag patterns in Chart 3. Flag and pennant chart patterns are known to be quite reliable. They are continuation patterns, a pause and consolidation after a sharp up move. As you can see the first flag was built starting in February 2002. The declining volume trend during the formation of this flag is bullish. It indicates a drying up of sellers. Then, more importantly notice the volume which I colored in red. This is the breakout volume, almost reaching 100,000 contracts, on two occasions of the first flag formation; again a bullish situation.
Now fast forward to the most recent June July time period 2002. It appears we have another flag formation that has finished as of this writing. Similarly, the volume trend was on the decline during the formation of this second flag. It is interesting to note also that the average total level of volume in the June July 2002 period, is much greater than the February March 2002 consolidation period volume.
The last 5 days of prices are doing what I call 'filling the pocket' right near the top right hand corner of the flag. This is where the final sellers are washed out and prices hover in a small crowded area before bursting higher.
A break out to the upside from the second flag appears imminent as of this writing. And this breakout will most likely be accompanied by a few days of greater than 100,000 contract volume. This is key to watch for in the coming days as it will not only confirm the breakout of the second flag is real, but also provide enough 'fuel' to power above the long term resistance line of 330.
Many individual gold mining stocks have been in consolidation moves the past 2 months forming symmetrical triangles and other forms of price consolidation on sharply lower volumes. They are confirming the bullish flag formations in the price of Gold.
THE BOTTOM LINE - In all three time frames shown above (Charts 1 thru 3) there is growing bullish momentum for the Price of Gold.