Gold: Beware the Harbingers of Doom - TheStreet

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.

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.

In addition, weekly stochastics has now swung from an overbought to an oversold level, indicating that bulls have been shaken out of their positions. Notice how gold bounced strongly (red circles) the last three times it hit an oversold level, including the dramatic turn in October 2008. This suggests the contract is setting up to move higher, at least for a few weeks.

Whether or not gold successfully "takes out" the December high on the next upswing is anyone's guess. At a minimum, any bounce will be a step in the right direction, because it's likely to damp bearish fervor on the yellow metal and yield a more balanced market that's supportive of the major uptrend in place since 2008.

The selloff dropped gold into a three-month trendline and the 50-day moving average on Dec. 17. That support level broke on Tuesday, with a quick downthrust to 1075. The contract then bounced and closed the week just below new resistance at 1106. This price action sets up an interesting scenario for this week and into early January.

Friday's close marks a key inflection point, because a rollover will confirm the trendline and moving-average breakdown, opening the door to a downswing that could reach "big" support near 1000. More importantly, a rally back over this broken level will trigger a "failure of a failure" signal that could mark the end of the decline.

That might be the bullish tell I've been waiting for since the selloff began on Dec. 3. However, thin volume worldwide between Christmas and News Year's Day will undermine the validity of any buy and sell signals in the futures contract. So, this is likely to remain a short-term trader's realm for at least another week or two.

Additional resistance near 1135 could define gold's future in coming months. That's the price level where the contract broke through the Dubai swing low, posted in late November. You can see this zone also marks the 38% retracement of the selloff, as well as seven trading days that failed to mount the significant barrier.

While the fast-fingered crowd can take advantage of any bounce above the trendline and 50-day EMA this week, longer-term players should pay attention to the shaded box I've outlined on the daily chart. A rally above this zone should mark an "all-clear" signal for the resumption of the gold uptrend and a rally to new historical highs.

Now see how peak gold pushes prices>>

At the time of publication, Farley held no positions in the securities mentioned, although holdings can change at any time.

Alan Farley is a private trader and publisher of

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