While gold has a shot at retesting $1,000 an ounce after this week's resurgence, will the latest rally have room to go further? Technical analysts say yes, but the rise may not be a one-way street.
Analysts said gold broke above a downward trend line, which was formed by connecting bullion's peak of $952.60 on April 17 and a high of $935.30 on May 22 - the two recent tops after prices began to slide following a record $1,030.80 on March 17. Bullion's current chart formation looks reminiscent of its price pattern in 2006, when it surged to a then 28-year high before falling, and that signaled gold has already reached a bottom for this year.
"Gold was just consolidating its prior move during its decline in the past few months. It's very normal on a technical basis for these markets to pause for a few months, consolidating their moves, and then break out all over again," said Adam Sarhan, founder of Florida-based TheSarhanAnalysis.com. Sarhan said a technical buy signal was triggered at the $915 mark, when gold surged above the trendline in heavy volume on June 26.
Spot gold has gained as much as 8 percent since it hit an intraday low of $873.50 on June 25, but it is still 10 percent below its March record. On Thursday, bullion traded lower at $934 an ounce, while US gold futures for August delivery were at $936.
Still, Sarhan said gold had found support at prices above its 200-day moving average in the past few months, and it is now trading sharply above its 50-day moving average. He pegged gold's next target at a resistance level of $956.20 an ounce.
PERFECT CORRECTION Gold's correction from its March record was a "perfect and normal measured move," and the market should have already bottomed out this year, said Hans Kashyap, president of Analytics Research in Porterville, California.
This is because the magnitude of gold's correction from March to May this year matched bullion's $195 decline from a top in May 2006 to a bottom in October 2006, based on continuous, front-month weekly prices, Kashyap said.
"The market will more or less stay in its character once a trend is established, so reactions and rallies will more or less be equivalent, and the normal reaction (this year) that we are looking for is between $190 to $195," Kashyap said. He said that the $960 level should be in the cards within July, but the rise to $1,000 could be delayed until October, based on bullion's price movements in 2006.
However, Adam Hewison, president of MarketClub.com in Annapolis, Maryland, said it might only take as little as a few weeks for gold to test $1,000 - once it crosses above key resistance at $935. Hewison said he's not worried about an overbought gold market, even though the relative strength index is hovering near 75, which is termed overbought in technical analysis.
INVESTOR PSYCHE A channel breakout based on monthly prices at $937.70 an ounce on Tuesday signaled gold's next move should be rising toward $950, said Larry Young, senior trader at Infinity Futures in Chicago. Young also noted a "W" formation on gold's recent weekly charts, which is a bullish indicator.
Even though technical analysis focuses heavily on charts, Sarhan explained how investors can profit from the strategy. "The reason why people look at charts is that it's a great way to measure investor psychology. At the end of day, we don't make money or lose money based on fundamentals, we all make money or lose money based on price," Sarhan said.