Note how the volume for August gold peaked with the early June market top, then dropped off as priced slipped lower. Volume rose on a short countertrend rally, indicating resurgent bullish optimism. A shift in market mood, however, was signaled by three days of rising prices on declining volume, culminating in a volume upsurge on the bar chart's final gap-lower day.

It should be remembered that volume can sometimes sputter for reasons unrelated to market momentum. Volume, for example, is typically light ahead of market holidays or in the advent of key report or statistical releases.

Open Interest

Open interest, plotted as a red line over the volume histogram, represents the number of commodity contracts outstanding. You can think of open interest as potential volume. Open interest is created when a new buyer meets a new seller (open interest rises by one contract); it's extinguished when an old seller transacts with an old buyer (open interest falls by one contract). Otherwise (old seller meets new seller or existing buyer sells to a new buyer), open interest remains unchanged.

A decline in open interest indicates liquidation, when market participants close their open positions without being matched by an inflow of fresh bulls or bears. An increase in open interest validates the existing price trend as it indicates increasing participation by new, or incoming, traders.

You have to mindful of normal variances in open interest. Interest in the August gold contract, for example, grew dramatically in mid-May as the result of trend-following traders rolling their positions forward from the soon-to-expire June delivery. Open interest in the August contract, now at plateau, can be expected to begin falling off in mid-July as positions are rolled forward to the active October contract.

The fact that open interest has essentially remained level indicates that there's about as much bearish interest as there was bullish interest in August gold.

In Summary ...

Technically, August gold's chart indicates:

• Prices: an intermediate-term downtrend following a failure to score new highs in early June
• RSI: a continuing downtrend
• MACD: a continuing downtrend
• Volume/Open Interest: a recent shift to bearish sentiment, matching the strength of the market's previous bullish conviction

This is clearly not an exhaustive treatise on technical analysis. It's merely a primer on the indicators commonly cited in HAI articles. Neither is this an argument for technical analysis over the fundamental approach. As stated before, most traders use a bit of both disciplines to make market decisions.

Technical analysis has its strengths, most importantly its timeliness. Technical analysis is concerned with what is actually happening in a market. This discipline also has its weaknesses, namely its reliance, for the most part, on normal probabilities and repetition in trading patterns.

Taking all that into consideration, though, there are times when technical analysis may be a trader's only recourse. Sometimes there are simply no guiding fundamentals. Think October 2008. A trader could, in such states, be rudderless without the technicals.