XAU Holding Breakout

11/15/05 08:01:10 AM

by Arthur Hill

After a short and sharp pullback, the Philadelphia Gold & Silver Index found support and broke trendline resistance to resume the uptrend.

Security: $XAU
Position: Accumulate

XAU broke above 100 and to a 52-week high in September. Both the breakout and 52-week high are enough to label the long-term trend as bullish. This means that declines are viewed as corrective and a bullish resolution is expected.

FIGURE 1: $XAU. The Philadephia Gold & Silver Index found support near broken resistance and the May trendline.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

The October decline represented a correction and the late October breakout signaled a continuation of the bigger uptrend (Figure 1). The decline was sharp, but retraced 62% of the prior advance (93 to 115) and formed a falling wedge. Even though the pattern and retracement are normal for a correction, things were looking pretty bleak after the October gap and close below 105. However, the index found support near broken resistance and the May trendline. The quick rebound broke the wedge trendline and filled the gap to resume the uptrend. As long as the breakout holds, I would expect a move to new highs and a break above 115.

The advance sputtered over the last few weeks, but I would not turn bearish unless the index moves below 104. The index surged above 110 last week and formed a harami over the last two days (red oval). These are bearish candlestick reversal patterns that required confirmation with further weakness.

After the breakout, a consolidation ensued in early November and this established support at 104. In addition, this support area is confirmed by the May trendline. A move below 104 would confirm the harami, invalidate the late October breakout, and break the May trendline. This would turn the bulk of the evidence bearish and I would then expect lower prices.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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