Originally published June 7th, 2009.
Gold did embark on a new intermediate uptrend as predicted in the last Gold Market update posted towards the end of April, however, the uptrend was not as strong as expected and it failed to break out to new dollar highs and is now starting to weaken again without mounting a serious challenge of the highs first. This is bearish for the short to medium-term.
On the 6-month chart we can see the modest uptrend in force from the start of May and how it took the price up towards $1,000 again, resulting in a gain of about $100. Last week it showed signs of serious technical deterioration as it buckled beneath the resistance approaching $1,000. This was hardly surprising given that the oversold dollar bounced strongly from important support, a reversal that projects a dollar rally to higher levels. So far gold's intermediate uptrend has not been violated, but the double "bearish engulfing pattern " that showed up on the chart during last week does suggest that a breakdown is pending, that will be followed by a significant reaction, although the fast neutralizing RSI indicator does suggest that this breakdown will probably be preceded by a brief bounce early this week. How far will a reaction carry? - it is expected to take gold back towards, but not necessarily right down to the support zone shown on the chart in the $880 area.
Despite the prospect of an immediate reaction the longer-term picture for gold looks positive. On the 2-year chart we can see that a high level Head-and-Shoulders top appears to be approaching completion, beneath a neckline at the resistance level approaching the highs. If this interpretation is correct then after the anticipated reactive phase is complete gold should turn up again and break out to new highs. Traders should note that the support and resistance levels shown are very important - failure of the support will be bearish and be viewed as a sell signal. On the other hand, a breakout above the resistance to new highs should lead to a sustained and substantial uptrend.
Since it is the reversal in the dollar that put the Precious Metals sector under such pressure last week, it is worth taking a quick look at the dollar chart. On the 6-month chart for the dollar index we can see that by early last week it had arrived in an important support zone in a severely oversold condition, which is an important factor that led us to thin our positions in the sector. The magnitude of the rebound, with 2 large white candlestocks appearing, is a signal that the dollar is probably making an intermediate reversal and therefore should enter a recovery uptrend in coming weeks that will put further pressure on the Precious Metals sector. How far might the dollar rally? At this point the 83 area looks like a reasonable target.
