Originally published April 18th, 2010.
For a while gold looked like it was breaking out, but several of the important conditions for a successful upside breakout that were explained in the last update 2 weeks ago were not met and on Friday gold turned sharply lower. Although Friday's drop is thought to mark the start of a reactive phase, it is considered likely that it will prove short-lived as the overall picture for gold remains positive.
On its 6-month chart we can see that after a 2-week rally gold stalled out near the upper boundary of the zone of resistance capping the trading range of recent months, and it can be argued that after two weeks of good gains it is entitled to a reaction, which - provided it doesn't carry too far - will put it in better technical condition for a successful breakout and sustained advance. It looks like it is starting to advance away from a Head-and-Shoulders bottom and moving averages are in bullish alignment, so the time is right for a major uptrend to begin, once the current reaction is done.
If we run through the conditions that require to be met for a successful gold breakout, that were set out in the last update, we find that none of them - so far - has been conclusively. Silver needed to break above its downsloping line of peaks of recent months. It has failed to do so and broke lower again on Friday and has further short-term weakness in prospect.
The dollar has broken down from its uptrend, but the break thus far remains marginal. Action in the dollar suggests that it may be forming a top area following its substantial rally from early December through mid-late February. If true this augers well for gold which generally has the wind at its back due to global money supply expansion.
PM stocks have been unable thus far to break back above the lower boundary of their uptrend and of course dropped significantly on Friday along with the market as a whole. However, sentiment towards the sector remains awful, which is bullish, and moving averages have swung into bullish alignment, so we could see dramatic upside action once gold and silver turn up again. Certainly the charts of many PM stocks look most auspicious at this time, which is why a clutch of them were recommended on the site over the past week or so, despite the HUI index not breaking back into trend.
In the last update the point was made that a genuine upside breakout by gold should be accompanied by a high volume breakout by thje GLD ETF. This never happened, so the champagne is still on ice. Instead GLD dropped on increased volume on Friday, so we might see some downside follow through before the sector turns higher again, although probably nowhere near as much as many as now expecting.
Finally we should note that gold did break out upside from a 3-arc fan correction pattern. It very often happens with these patterns that following a breakout, prices react back to support at the 3rd fanline boundary. This is certainly worth knowing as it gives us a potential target for the current reaction, which if reached should prove to be an excellent entry point. The short-term reaction scenarios for both gold and silver should synchronize with the fallout reaction anticipated in the broad market as a result of the impact of the Goldman Sachs scandal, as set out in the article on the site on this subject.
