Slight Rally for Gold

Updated from 12:58 p.m. EST

Gold bounced slightly Monday, but following last week's plunge some market watchers were bracing themselves for another potential drop.

Contracts for February delivery of gold rose $2.50 to close at $609.40 an ounce on the Nymex. The bullion holding exchange-traded funds, streetTRACKS Gold Shares(GLD Quote) and the iShares COMEX Gold Trust(IAU Quote), followed suit, each adding about 0.5%.

Despite the minirally, investors would do well to act with caution, because at least one key technical indicator has turned particularly bearish.

"Friday was a big day. We broke though a head-and-shoulders top and pierced the neckline at around $611," says Joe Palmisano, chief technical analyst at IDEAglobal in New York. "This suggests we could see a measured move down to $580 before all is said and done."

He adds that any strength will likely be capped by selling around $620 to $625.

Other observers concur and point out that traders have to be alert for a possible shift.

"Gold cannot be immune to a commodity bubble cave-in, at least in the initial phases," says Jon Nadler, an analyst at Montreal-based bullion dealer Kitco. Nadler noted that the meltdown in the base metals market, which has seen weakening fundamentals lately, may be dragging down gold, as well.

The action in the currency markets, a key driver of bullion prices over the past few weeks, was taking something of a backseat. One dollar was recently buying 118.58 yen, down from 118.68 yen late Friday. One euro was buying $1.3023, up marginally from $1.30 previously.