Gold: Trendlines Tell the Tale

In our previous gold futures commentary (Monday, Oct. 14) we noted that the chart showed December gold at a critical intersection of the $316 benchmark, a point at which a trendline and a parabolic bowl crossed. We wrote, "Gold cannot afford to penetrate $316 this week, otherwise it risks a much greater decline as both bowls will have been broken." Gold broke down beneath this intersection at $316-$317 on Tuesday and was down as low as $310 on Thursday before rallying up to close slightly above $312, the other pivot we mentioned last time.

So now that $316 is broken, what's in store for the gold market? As the 10-week uptrend line off the August lows was broken this week, it now appears that a test of the short-term trading lows between $300-$304 is next. This is derived by measuring the highest distance at which gold traded above its previous trendline and subtracting that amount from the point along the trendline at which gold broke down ($316-$317). Using this tried-and-true trendline formula a downside objective of $300, give or take, is derived. Note the broken trendline in the daily chart below, along with the latest configuration of parabolas.

The previous parabolic bowl was broken on October 1, which of course presaged a substantial decline (as broken bowls always do). The dominant pattern in the gold market now is a parabolic dome which began forming in August at precisely $300 and has downside potential (in terms of price) to $300 before it exhausts. Until this bowl is broken the short-term trend in gold remains down.

Also worth noting is the development of a parabolic bowl in the 5-day tick chart (not shown). Closing beneath $312 would essentially crack this bowl and confirm the next downswing has begun. This would provide the ultimate test of just how strong the $300 psychological benchmark really is. As mentioned in last week's gold commentary, the $312 level remains pivotal in December gold.

Finally, note the potentially bullish triangle pattern in the dollar chart below. A breakout above the triangle top at $110 would be bullish for the dollar and presumably confirm the bearish short-term trend in gold.