GETTING TECHNICAL
Gold Has More Upside
By MICHAEL KAHN
A major upside breakout suggests that the metal's bull run is just getting started.
IN A MOVE THAT has been 18 months in the making, gold scored a major upside breakout this week. Despite economists' reports that inflation is nowhere on the horizon, the yellow metal has run up to all-time highs as a decade-old bull market enters it next phase.
To be sure, technical breakouts are far from guarantees that any trend will continue higher. But given the epic battle between the camps of inflation and deflation, we have to believe that the push through a very stubborn price ceiling is significant. Bulls gained enough power to soak up all that the bears could offer, and then some.
Simple economic theory tells us that prices should rise further.
If we home in on recent action, we can easily see a trading range since early September straddling the key $1000 mark (see Chart 1). Although prices made several temporary excursions above this price, the handwriting was on the wall for the pending breakout.
Chart 1
In all previous attacks on 1000, it was only a matter of a few days before the sellers took back control. This time, the market hovered at this key resistance area for nearly one month, and that is not how bearish markets act. Truly bearish markets do not let investors sell their holdings easily. They kiss resistance and immediately drop.
Moving out to a long-term chart, the breakout is also clear (see Chart 2).
Chart 2
We can draw a textbook horizontal resistance line from the March 2008 high of 1034 or, in my view, a more meaningful line through daily closes at 1005. Both have been breached with good supporting technicals such as volume and momentum.
The next question is where the market is heading, and to find it we can employ a simple measuring technique. Upside projections for pattern breakouts are often similar in size to the patterns themselves. By measuring the pattern's height and adding it to the breakout point we get the target price.
For the pattern that had been in effect since early 2008, we get a target in the 1300 area.
Even for a gold bug, a 30% move is rather hefty so let's apply this technique to a shorter-term pattern. A smaller trading range marked trading in 2009, so if we project its height up from the breakout point we get a more conservative target near 1150. Let's see what happens if and when gold reaches this lower milestone before thinking about the higher one.
Silver presents a different view. Although it remains well below its 2008 peak just north of $21, it has been outperforming gold for the past year (see Chart 3). And while it is missing a major technical pattern from which to break out, it sports an orderly rising trend and a breakout above a smaller resistance at roughly 16.
Chart 3
This level stopped the market's advance in May of this year, and it also supported the action throughout the first half of 2008. Early last month, silver punched through it, rallied for a few weeks before correcting back and then jumped higher again. Here we see an example of a strong market not giving late investors much time at a "cheap" price before rallying again.
The bottom line is that gold and silver are strong, and we can say that even if we take the effects of a weak dollar out of the equation. Gold priced in euros, Swiss francs and Canadian dollars -- all have broken out above respective resistance levels.
For now, unless there is a shock from outside the market to say otherwise, the bull market in gold is engaged once again.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
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