Over the last two weeks, gold has had some difficulty clearing the stubborn resistance level beginning near $1785 and extending towards $1800, round number psychological resistance. It has poked its head into this zone but cannot breach it as of yet.
When examining the chart it is not difficult to understand the significance of this region. Note that there have been two occasions in the last year, one back towards October 2011 and the other earlier this year in Jan/Feb, when gold either punched through this level or came extremely near to it, but failed to close ABOVE it.
Look carefully at what happened the following week after the failure to extend higher - there was a downside reversal in both cases which led to a protracted period of falling prices that did not culminate until gold was near the $1525 - $1550 level. It was at this level, that we later learned, Asian Central Bank buying prevailed. That buying was of such size that it absorbed all of the speculative selling and then some forming the bottom of this now YEAR LONG trading range.
Gold is currently knocking right on the door of this upper boundary which is why it has heretofore been stymied.
There is something however that is at least hinting that this third time might be different. Notice those two previous attempts to clear $1800 were followed by those aforementioned downside reversals the next week. This week, following on last week's failed attempt to clear $1800 is different. We did get a significant down day this week which looked as if it might be setting up the same pattern of a downside reversal, but lo and behold, instead of a proliferation of sellers, we uncovered very strong buying which took the price well off the intraweek low closing the market up near the high of the week. Yes, it did not take out $1800, but it also did not fall apart.
I am looking at this as a potentially subtle hint that we might be able to extend higher in gold next week or at the very least, not break down technically as we have done previously.
This week's low, down just below the $1740 level therefore becomes quite significant from a technical analysis perspective. If we drop back down towards this level and gold bounces higher once again, the bears are going to begin covering. If the market can then extend the bounce and push into the zone $1785-$1800 and better that, it will touch off a wave of significant, and I do mean "significant" short covering that will initially send the price towards $1825- $1830. I think that if we get this, we will move quite quickly to the all time high up near $1900 before we pause.
If we violate this week's low to downside and especially if we close down below it, expect a sharp drop down to $1725 - $1720 and then to $1700 if that fails to attract some strong buying.
We will simply have to wait and see what early week action gives us next week as the market is now at a crossroads where both sides are either going to perform or have to yield the field of battle. Gold bulls do have the advantage right now based on the close of this week but they will need to stand their ground and push through the selling cap that is being imposed by the bullion banks/swap dealers.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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Friday, September 28, 2012
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