Gold Has Something to Prove

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Gold had a significant up day on Friday closing near the highs. At first glance, it would seem like a positive development and that gold miners might be in for another leg up. I would say a case could be made for either outcome, but this week should be a decision week for what is next for the gold and miners.

This is gold going back 20years. It is a weekly chart with a 52-week bollinger band. Notice how well price holds the 52-week MA during gold bull markets suggesting it is still in one. However….

In observing the 20-period linear regression, when gold reaches a level of 10 and turns back down, it marks a period of consolidation usually lasting a 3-6 months. At this juncture, the slope has turned back down, but price has only been consolidating for two months. History would suggest that gold needs more time to rest.

Looking at the 10yr chart, you can see the large bowl-like pattern which would seem to indicate a cup & handle formation in progress. $1914 was the previous high, but it would seem that 1800 is the more significant level to test with its three clear rejections in 2011-12.

Finally, zooming in to one year, gold failed its downtrend line test and clearly has a bear flag formation. This resistance has to hold for the bear case to continue. The downtrend line needs to hold.

Looking at the gold miners ETF (GDX), it is a bit more choppy than gold and a big reason why I always like to keep an eye on the supporting metal to help with clarity. In the one year chart below, GDX shows a pretty clear bear flag as well. Notice also the Bullish Percent Index which is showing the sector as a whole is having trouble making any higher highs during advancing periods. In a impulse/correction view, the sharp moves are down while the up moves are shallow suggesting selling pressure is still present.

Zooming in to a three month view below, the bear flag has been violated to the upside as of Friday’s close (excuse the chart above, it was taken intraday on Friday before the breakout).

That would normally seem to be an invalidation of the bear flag, but there are two significant resistances above. First, the open gap from Sept 21st and secondly, the 61.8% retracement. The fibonacci especially is a major bull/bear trend divider. If price can close over the 61.8% retracement, odds are price will test the main DTL next. Then we see if GDX has the strength to break out. Additionally, regarding the 61.8% resistance, notice the three times price tried to break over after the early August decline without success. This will again be a key level to watch after the mid-Sept impulse drive lower.

Good luck.