Gold: Beware the Harbingers of Doom

Gold futures rallied up to 1034 in March 2008 and pulled back for the next seven months, in loose correlation with the worldwide equity crash. The contract bottomed out at 681 in October that year, when it tagged its 200-week moving average, and began a slow recovery that preceded an historic breakout over 1000 about three months ago.

The rally carried up to 1228, where it topped out on Dec. 3. The subsequent decline has brought yellow-metal prophets of doom out of their caves, pounding the tables about the end of the powerful uptrend. However, I think they're dead wrong and the gold rally will eventually push toward $1800, a target I discussed back in October.

Gold Futures Weekly -- 200-Week Moving Average Source: eSignal

Even the strongest uptrends grind through trend and countertrend waves, so the current decline doesn't bother me. In fact, in my view, it's likely to yield one of the best trading opportunities in early 2010. The trick is to sit back and let the charts signal when the gold downswing has finally run its course and the contract is ready to resume its upward trajectory.

That defining moment might come in the next few weeks, but I'm willing to wait until the pullback reaches the initial breakout level near 1000, highlighted by the intersection of the two blue lines in the weekly chart. No, I don't think the decline will get that far, but even it does, the broad uptrend will remain fully intact.

Indeed, several factors indicate the gold selloff is finally near its end. First, the contract closed out the holiday-shortened week with a bull hammer candle over 1100, showing that buyers are getting more aggressive. However, this one-bar pattern needs verification with a subsequent bar that trades above the hammer and closes the week strongly.