Precious Metals Coil for a Bounce

This column was originally published on RealMoney on Dec. 13 at 12 p.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

After nearly six weeks, I believe it is time to revisit the gold and silver sector. Back in October, the precious metals were receiving a steady stream of capital on institutional accumulation. Since then, however, they have moved up against intermediate-term resistance levels.

Today, I wanted to follow up on my column on Nov. 1 to see how well they are faring in the current market environment.

The accumulation we witnessed in October can happen for a number of reasons, such as asset allocation, a hedge against inflation, portfolio protection in uncertain times and currency hedges like the falling dollar.

The dollar is one of the major driving forces of precious metals. When the dollar falls, gold usually responds by going up. The dollar has been weak for quite some time, but lately, every time you turn around, you hear a news story about the decline in the dollar and predictions of its continued demise.

When you hear so much negativity about a particular sector, it's usually about the time you will see a change in the trend.

Let's take a look.

I said on Nov. 1 that a break of the 85 level would, at the least, lead to a test of the May and June lows. Well it didn't test that level, it plunged right through it. Now the dollar is trying to recover some of its recent dive. It looks like it may be able to move up to the 84 or 85 level before resuming its downtrend.

As the dollar has bounced higher, the Gold & Silver Index (XAU) has retreated off of the 150 resistance level. A test of the 200-day moving average around 140 would be healthy for this index before moving higher. A break below 135 would signal a change in the trend.

The streetTracks Gold Trust (GLD Quote - Cramer on GLD - Stock Picks) reflects the performance of the price of gold bullion, less the expenses of the trust's operations. GLD also has started to pull back to support in the 61-62 area. If the shares can break above the 65-66 area, we may be in for a new leg up in the gold market. There is solid support at 60 and a break below there would change the trend from up to down.

The precious metal sector still looks healthy, and the cup-and-handle formations may be signaling that the sector is preparing for another move higher. Watch for a break above the resistance levels and keep your protective sell stops below the above support levels.