Gold futures pulled back in a steady decline, after reversing at $1,000 on Feb. 21, and gave up a good chunk of the post-October recovery rally. The contract broke six-week support at $900 on Wednesday and sold off to $882 about three hours before the latest Fed rate decision. That dip marked the low tick of the four-week correction.

The contract went vertical after the 2:15 p.m. announcement, as market players interpreted the latest Fed liquidity efforts as highly inflationary. In addition, the buying spike spread through the industrial commodities, including copper, steel and crude oil. Thursday and Friday brought little relief, with all groups heading into the weekend near their highs.

The reawakening of commodities in the middle of a worldwide slowdown could trigger a major episode of the law of unintended consequences. On the one hand, we might see raging bull market in the commodities and related equities that drove the raw-materials rally in early 2008. On the other hand, the rise in core prices could have a devastating effect on demand creation in the post-crash environment.

However, this turn of events should be great news for the trading community, because greed-driven buying pressure has been a missing element in the equity markets for many months. The reintroduction of steady uptrends into the mix of collapsing stocks should provide welcome relief and contribute mightily to 2009 profit production.

Gold Futures -- 120-Minute Chart
chart
eSignal

Precious metals are the place to start our hunt for profits, because gold is setting up for another test at $1,000. Note how the recent decline tagged the 38% retracement of the October to February rally and closed Friday at the 62% retracement of the monthlong correction. This is a natural spot for a consolidation and pullback to test last week's gains.

The last phase of the selloff evolved in a declining channel that was broken to the upside on Wednesday. New support is near $920, but that number will drop a few bucks each day. It's possible that a final buying surge will carry price into the 78.6% retracement at $981 before a reversal, but I suspect the pullback will begin at or near the current level.

Gold Futures -- Weekly
chart
eSignal

Channel support marks a good spot to buy related equities for an upturn and test of the $1,000 level. That psychological barrier is where the fun really starts, because momentum, triggered by Fed action, should carry even higher and hit gold's all-time peak at $1,034. In turn, that surge will complete the next phase of an evolving cup-and-handle breakout pattern.

It took four weeks for the contract to pull back and reverse after its four-month correction. It should take another one or two months to complete the handle of this pattern and set up a major breakout. That projection points to the middle of the second quarter as the time we might see the yellow metal finally take off and head toward $1,500.

Which precious metals instruments will perform best in a gold breakout? As many readers know, most underlying equities don't move in lockstep with the futures contract because of varying resource quality and hedging practices, as well as exposure to other raw materials. So choosing wisely will go a long way toward booking solid profits.

Here are my top 10 picks in the gold equities group:

  • Anglogold Ashanti (AU)
  • Aurizon Mines (AZK)
  • Compania De Minas Buena (BVN)
  • Eldorado Gold (EGO)
  • Gold Fields (GFI)
  • Randgold Resources (GOLD)
  • Northern Dynasty Minerals (NAK)
  • Royal Gold (RGLD)
  • Seabridge Gold (SA)
  • U.S. Gold (UXG)
.

SPDR Gold Trust (GLD) -- Daily
chart
eSignal

Of course, you could choose to avoid company exposure entirely by trading the SPDR Gold Trust ( GLD). This liquid instrument shows support just above $90, and a futures rally to $1,000 would correspond to $99. Notably, the broken channel top and the 50-day EMA are now converging, and that should attract additional buying interest on any downturn.

Platinum Futures -- Daily
chart
eSignal

What about other precious metals? Platinum looks more interesting than the silver contract here, which isn't positioned for a dramatic uptrend. That's ironic, because platinum got beaten up more severely than silver in 2008. However, it's now probing over resistance at $110, after last week's strong rally.

A basing pattern near the high would support an uptick that reaches 135, or a 20% rally from Friday's close. Keep in mind this is strictly a trading rally, which means that profits need to be taken aggressively when price approaches resistance. On the other hand, a gold breakout to an all-time high would support investment goals in longer-term portfolios.


Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.

Alan Farley is a private trader and publisher of Hard Right Edge, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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