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Gold Has a Chance to Retest May's High


If investors are going to win the day, they'll need Gold to overrun traders. That day may soon arrive. It might have arrived last week.


Gold's wide six-month trading range pushed up against key resistance two weeks ago. Repeated attempts since then to decline have stopped short of succeeding. Traders that don't recognize the market's shift from trading range to trending might get caught on the wrong side of a bigger move, or leave substantial profits on the table.

Gold's price range between November 2004 and October 2005 was less than 50 dollars, fluctuating just more than 5% within a sideways channel. The metal had steadily improved to a 40% gain from its price two years earlier, so the consolidation was just that - a consolidation of the rally's gains. Repeated dips under prior highs were recovered and eventually slightly higher new highs were eked out. All in all, a success for Gold's bulls just to avoid a more substantial correction.

Corrections come in two shapes. One is more commonly recognized as being a steep retracement of recent trending. The other form that corrections can take is a protracted trading range. The latter isn't less common; it's just less commonly recognized, as market participants tend to shift their attention elsewhere while the trending dries up. But the "unwatched pot" eventually boils over, and rather than trying to resume the prior trend, new trending emerges from a solid base.

That's where Gold found itself one year ago, last November. October 2005's probe above prior highs didn't gain momentum, but neither was it rejected. A couple of selling attempts failed to reverse back under November 1994's prior high to resume the channel or to reverse the trend down. There was only one direction left. Gold surged 50% in six months between the first week of November 2005 and the second week of May 2006.

Half of that gain developed during the rally's last two months, and that half was fully retraced within one month. The life of a Gold trader hasn't dulled since then, with a choppy 100-dollar trading range providing new opportunities almost every other week to buy a bounce, short a drop, or the reverse of either.

The metal's wide six-month trading range has been a trader's delight. But for investors that continue to hold it has been a trying time; two rally attempts in the last two quarters each peaked at lower highs. If investors are going to win the day, they'll need Gold to overrun traders by reversing up from support instead of plowing through it, and by extending above resistance instead of once again reversing down.

That day may soon arrive. It might have arrived last week.

Gold's last low was in October, at 563 basis the December contract (the front-month will soon roll to February expiration, which is currently valued about 5 dollars higher). A rally targeted the 630 area, which was met during November's first week. Except for a single session's false breakout 7 dollars higher that was reversed immediately, the target has held two more tests as resistance.

The price action is similar to one year earlier during autumn 2005, not only for its failed probes of higher highs, but also for failing to convert those failures into a decline. Four timed during last week's 15-dollar trading range, Gold was essentially 10 dollars lower than it was less than 24 hours earlier. Yet, despite these periods of forceful selling, despite spending the entire week under the prior week's close, Gold repeatedly recovered to close back above each probe of the prior week's low.

Traders can't be faulted for expecting to see lower lows in the near-term; the Pavlovian response trained in them by the six-month trading range doesn't allow a 15-20 dollar dip to suffice when the prior rally leg was 60 dollars. Those traders might yet get their lower low. But they also might be surprised to find it limited to only a 5-dollar margin down to the 605-610 area, and they might also be surprised to find that margin disappear as quickly as it is created.

Another dip isn't necessary at this stage of the pattern and would only trap more traders in losing short positions if the decline did not immediately extend sharply lower. But whether from that brief lower low, or simply from the next sudden price surge, another rally leg would break the pattern's trading range to trigger a retest of May's high, and higher.

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