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In mid July the December gold futures contract formed an "evening star" followed by a "three black crows" candlestick pattern and both correctly suggested further declines ahead. The futures contract had support at $844 (all figures in U.S.) but dove through that level and the psychological $800 level to a weekly low of $777.70. The low coincided with a 161.8 per cent Fibonacci retracement of the June-July 2008 ascent and that magnitude of a correction usually suggests a possible end to the current downtrend.
The mid-August strong rebound from the lows occurred on an open window gap which is extremely positive. However, it appears the gold futures contract may be at resistance offered by the lower trendline of the ascending channel at about $840. Additionally, although the RSI has turned positive from an extremely oversold level, the MACD is still issuing a sell signal and both indicators did diverge negatively at the low. Until the MACD turns positively, expect volatility in the gold market. If the contract closes above $840 then expect a rally to first resistance at the 20-week MA at $866 followed by a rally to the 41-week MA at $908.
The question remains as to whether the correction is one in a bull market or whether the top is in place. Since the MACD and RSI have hit new yearly lows you could expect that a top is in place. The key level to watch on any pullbacks would be $810 (U.S.) now. A close below that should alert you that the recent low would be retested and new lows could possibly be ahead.
However, a view of the monthly chart, not shown, lends more perspective indicating that the December gold futures contract appears to be in a second wave correction of a third wave advance and thus higher prices should be expected ahead. Third wave advances are the most dynamic waves in the Elliott wave sequence, but patience will be required at the moment. Looking ahead, if Gold closes above $992 (U.S.), the weekly flag pattern traced out since September 2007 suggests a possible rally to about US$1331 over the ensuing eight months.
The December silver futures, July-August breakdown, appears to be more severe than gold's as silver prices tumbled below the bullish ascending triangle's multi-year lower support trendline, finally finding support offered by the 200-week MA and long-term support from the August 2007 low. The rally from the recent August 2008 low of $12.30 is positive as the following weekly candlestick started with a bullish open window gap. Additionally, both the MACD and RSI are extremely oversold. The future's contract needs to close above the ascending triangle's lower resistance trendline at current prices of $14 to suggest a rally back to about $15.32 and possibly as high as $16.
However, investors may wish to lock in profits at that time as both the MACD and RSI diverged negatively and made new yearly lows in August suggesting a retest of the low at $12.30 and possibly new yearly lows to about US$10 thereafter.<
Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.