Rally in Precious Metals Is in Peril

This barrier also converges with the declining-highs trend line in place since the March high. Taken together, it's likely the gold rally will stall soon and give way to an extended consolidation phase, or even another selloff wave. For this reason, gold players are advised to book profits or protect long positions with tight stops.

The pattern since March also shows an expanding wedge, which is a high-risk formation because downside exposure at resistance levels -- like $900 -- can be quite painful. In this case, the contract could drop all the way to $650 and not affect the pattern. However, I doubt that will happen because three selloffs since the high predict the correction is finally over.

Alternatively, we rarely see a V-shaped rally back to a major high at the end of a long correction. Instead, back-and-fill action, with a series of higher lows, often sets the stage for a stronger recovery many months after an actual low is posted. I suspect that's what we'll see on the weekly gold chart through the first half of 2009.

With this in mind, I'm looking for a trading range between $750 and $900 that persists for three to six months at a minimum. That sideways grind would establish a decent basing pattern for an eventual assault on the $1,000 level. The consolidation might also correspond with stabilization in world growth that would, in turn, reintroduce inflation pressure.