Gold Approaching Possible Breakout/Breakdown

08/03/09 11:53:06 AM

by Donald W. Pendergast, Jr.

Gold quadrupled in price from late 2001 until early 2008. Since then, gold is still about 7% below the highs attained early last year, but the chart suggests that big changes may soon occur in this market.

Security: Gold, GC, GLD
Position: N/A

Gold, along with silver, tends to do very well during periods of high consumer price inflation (1968-80 being one such time period) and during long-term commodity bull markets (again, from 1968 to 1980, and 2001 until today). Demand for gold comes from several sources: industrial, investment, and speculation interests all play a major role in determining the price direction of gold. Industry needs the metal for a variety of manufacturing purposes in the defense, electronics, jewelry and dental care industries, investors want gold as an inflation hedge, and speculators want to trade the various moves in the metal, up and down, frequently using futures contracts to do so. Right now, the gold market is consolidating in three separate time frames (daily, weekly, and monthly), but the price action on the monthly chart may be the most interesting of all.

FIGURE 1: GOLD, MONTHLY. The presence of a pennant formation within the larger triple-top buy pattern lends a modestly bullish air to this chart.

Graphic provided by: MetaStock.

Figure 1 is the Handy and Harmon chart for monthly gold; even an untrained eye would likely realize that this particular commodity has been in a major trending move for nearly eight years. Skilled technicians would also note the increased depth of each proportional pullback (large green and red circles on the chart) against the major uptrend; note how much larger the 2008 retracement move was than the one that preceded it in 2006. The big question now, of course, is, "What's next?"

If we step back from the chart for a moment and take in the big picture, we may at least be able to whittle down the number of possible outcomes. First off, the long-term uptrend lines are still intact; if gold breaks down from the triangle/pennant pattern, it could drop as low as $725 without violating the symmetry of the long-term uptrend. The gold rectangle on the chart highlights the most pronounced areas of support, all residing between $725 and $840. (Please remember this is the cash-equivalent price of gold, and not the price of any particular gold futures contract.) Note how the Keltner bands have helped delineate the massive uptrend in gold since 2001; since early 2002, the price of gold has remained above the Keltner band midline (thin blue line at the center of the Keltner bands), never once falling below that critical support/resistance line.

Even on the big 2008 selloff that saw gold plummet from $1,011 all the way down to $713, the line was never touched -- and the line is still rising. If gold can manage a monthly close above the upper boundary of the green triangle pattern, it could be the tipoff that the run in gold is destined to carry to higher prices. Most technicians realize that a triple-top breakout is a very powerful pattern, one that frequently leads to a major trend-following move, and that's exactly what's shaping up here. While these patterns can and do fail (trading being a game of probabilities, after all), the fact that the triangle pattern is also integrated within the triple-top buy pattern makes it of special interest to gold bulls everywhere. Be sure to put this monthly chart on your watchlist to see how all of this plays out -- the moves up or down could be hard and fast.

Perhaps the best way to play a monthly breakout/breakdown of gold is to let the anticipated break happen and then move down to your weekly and daily charts looking to capitalize on pullback against the trend type moves -- either up or down.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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