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Gold broke down and went into decline, as predicted
in the last update posted early this month. At that time our maximum downside
target was the strong support in the $880 area, but now there are strong
signs that the decline has either run its course, or is close to having done
so, and that a breakout to new highs may be close at hand.
 
On the 6-month chart we can see how the double bearish engulfing
pattern at the highs led to gold going into retreat as expected, within a
tightly defined downtrend. Although price action shows little sign of the
downtrend ending, we can observe several strongly bullish influences that
could lead to its ending anytime soon. One is the proximity of the rising
50-day moving average, while another is the bullish alignment of both moving
averages, the 50 and 200-day. In addition the price has dropped back into a
zone of support, and finally short-term oscillators have neutralized as a
result of the reaction, renewing upside potential. Although helpful inasmuch
as it enables us to examine recent action in detail, the 6-month chart is
useless when it comes to divining the major trend and determining gold's next
big move. To do that we need to refer to longer-term charts.
The longer-term 3-year chart provides us with more of a roadmap
showing where gold is relative to its major cycles, enabling us to figure
where it is probably headed next. Superficially the pattern that appears on
this chart looks like a major top area forming beneath the strong resistance
approaching last year's highs, but if we look closer we can see that a
bullish high level Head-and-Shoulders bottom has formed beneath the
resistance which forms the neckline of the pattern. This formation is
remarkably symmetrical and if the symmetry continues gold will complete the
pattern shortly by blasting out of the top of it to new highs. If this
interpretation is correct then clearly we at a good point here after the
recent reaction to accumulate or build positions in gold and gold stocks.
While the dollar rebound of recent weeks was predicted in advance,
which was a factor leading us to take profits in PM stocks at the start of
the month on www.clivemaund.com, there has not been as much follow through by
the dollar as we had expected, and now the dollar is looking increasingly
vulnerable to another downleg that could be severe. On the 1-year chart for
the dollar index we can see how it has temporarily stabilised above the support
level shown, allowing its oversold condition to unwind, but it has, thus far
at least, failed to make much headway and with the falling 50-day moving
average coming into play and starting to pressure it from above, it is
looking increasingly vulnerable to breaking lower again to commence another
downleg. If the current small trading range is a bear Pennant, which is what
it now looks like, then the downside target for the next downleg is the 72
area. It should be obvious that if such a move transpires, gold is likely to
break out to new highs and will probably advance to the $1080 area, which
could happen quickly.
Finally the huge upside volume in big silver stocks on Friday is a
circumstantial factor that also suggests an imminent end to the downtrend in
both silver and gold.
Clive Maund
Diploma Technical Analysis
support@clivemaund.com
www.clivemaund.com
All articles by Clive Maund
Trading the precious metals and Energy
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