Gold Chart and Comments

I am posting a weekly gold chart to provide a longer term perspective on the metal's prospects so as to eliminate some of wild swings in price associated with both pre-election sentiment as well as post election sentiment.

First notice that the range trade is still solidly in place with $1800 capping the top and $1530-$1550 supporting the bottom.

Note that while gold broke the downtrend pattern in late summer this year when it pushed through 1680, it still remains within that broad sideways pattern.

This week produced what is known in technical analysis jargon as a "bullish outside reversal pattern". It occurs whenever a market makes a new LOWER low price and then reverses higher to make a high ABOVE THE HIGH OF THE PREVIOUS BAR and then closes above that previous high. That is normally a sign that the selling has exhausted itself, being overdone, and that valued based buyers believed prices were too low and thus, rushed in to scoop up a bargain.

This particular pattern has more validity to it when it occurs after a period of prolonged selling. It also is reinforced when the low price reaches into a region on the price chart that has in the past, formed a technical support level.

Take a look at the first reversal pattern that formed on the chart back in late May of this year. Notice that it reached down into a previous support level near $1535 and then shot sharply higher moving some $100 points off the low. That was a sign that the sellers had exhausted their ammunition and that the bulls had now seized control of the market. The market rested a bit before it then powered on to test the $1800 level. A very impressive rally indeed!

This week's pattern comes after a 4 week interval in which the market ground steadily lower after having failed to once again best the critical $1800 level. With the low on this pattern coming in very near to the exact center of the broad sideways range, the pattern needs to be respected because it would seem to indicate that the "VALUE REGION" for gold has now been set at a much higher level than the previous value level down near $1535-$1550. In other words, the big physical market buyers apparently believe or have at least grown accustomed or acclimated to a gold price just below $1700 as cheap.

If this is indeed the case, and we will certainly know this if price were to subsequently retreat for any reason and uncover enough solid buying above the $1700 so that the price were to not dip below that level and hold firm, then gold looks set to make yet another run to try that stubborn $1800 level.

The onus is on the bears to overwhelm the buyers down near $1700 if they are to invalidate this pattern. The bulls on the other hand will need to attract sufficient momentum based buying (hedge funds) to this time take prices up to and then through $1800. If they fail once again to better $1800, back down the market will go although my guess is that based on this new chart pattern, it will not dip below $1700 should that occur but will much more likely attract new buying closer to the HIGH of this week's reversal pattern near $1740.

Stay tuned - the one impediment to a march higher in gold right now seems to be the mediocre performance of the mining shares as evidenced by the HUI. It is always much more constructive to the upward progress of the yellow metal to see the bullish engine firing on all cylinders and that means that we need to see the HUI back above 500 but particularly ABOVE the high of that most recent BIG DOWN WEEK.

A lot depends on what the broader stock market is going to do as far as the mining sector goes. Take a look at the last chart of the S&P 500. It has collapsed as a result of the Obama election as business knows full well what is coming their way. The interesting thing to note is that the THREE DAY POST ELECTION collapse has taken the index back exactly to the halfway retracement point of its rally since June of this year. It did temporarily run out of sellers on Friday and mananged to bounce off of that level as shorts booked profits. If the market can stabilize above this level early next week and move back above 1400, the bulls will have managed to avoid a major rout. If however, this week;s low gives way, look for the index to drop all the way down towards 1350-1344 before finding any buyers of size.