(Clive Maund, Money Metals News Service) Gold has made impressive gains so far this year, but when it spiked up to touch $3,500 in the middle of April, it became heavily overbought. That’s when gold went into a rectangular consolidation pattern that has given time for the overbought condition to fully unwind.
Because there is still a considerable gap with the 200-day, it means that there is room for the price to break down from the Rectangle and correct back towards or to this average.
In attempting to weigh the probability of this happening versus the price instead of breaking out upside from the Rectangle, we need to inspect the volume pattern and volume indicators, which normally provide valuable clues in a situation like this.
So, on the 6-month chart for SPDR Gold Shares, we see that, while the volume pattern is a little hard to decipher, the Accumulation line has continued to trend higher from the April peak as the price has tracked sideways and has even made new highs in recent days.
This is bullish and implies that, rather than breaking lower into a correction, GLD and thus gold itself will instead break higher into a new upleg.
If it does break lower, a likely scenario is that a short, sharp drop is followed by a rapid reversal to the upside.
This uptrend remains very much in force, with the price still well above the lower rail of the channel – even if it broke down from the Rectangle shown on the chart above and dropped to the $3100 level, it would not violate this channel.
On this chart, we can better see just how overbought gold got last April, hence the trading range that has since formed that we looked at above.
This chart makes clear that the breakout early last year from the large trading range that started to form in the middle of 2020 actually marked the breakout from the Handle of a gigantic Cup & Handle continuation pattern that started to form as far back as 2012.
This is a truly enormous consolidation pattern that certainly has the capability to support a correspondingly big bull market, and as we are only about 16 months into this major new bull market, it clearly has much further to run.
If gold should instead break down from this range and correct back towards or to its rising 200-day moving average and the lower rail of its uptrend channel, it should then reverse back to the upside into a vigorous uptrend. Volume indicators are suggesting that the former scenario – a breakout into another upleg from the trading range without any further corrective action first – is more likely to prevail.
Originally Published by Clive P. Maund.
Clive P. Maund is a longtime trader who has provided professional chart analysis for over a decade, covering a wide range of markets with a special focus on the resource sector. In addition to his decades of trading experience and financial research, Clive obtained a UK Society of Technical Analysts diploma.
