How much Juice is Left in Gold's Tank?

December Gold: $309

Critical underlying support: $309
Critical overhead resistance: $310

Gold passed the $307.50 test on Friday, overcoming that level that we highlighted as immediate overhead resistance in our last report. Now that $307.50 has been overcome there remains yet a final test of internal strength that will be given on Monday-whether or not gold can overcome $310 in the early part of trading and, equally important, whether gold can close above $312.

Notice the latest 10-day tick chart for gold. While one immediate-term line of supply was taken out on Thursday, and another one removed on Friday, there remains yet another very important immediate overhead resistance at approximately $310, where gold will likely try to test as the session opens on Monday. Failing to overcome this level early will result in gold breaking through its 2-week parabolic bowl in the tick chart (the rim is currently around $309) and this would be immediate-term bearish. Gold basically has one chance to overcome that stifling layer of supply at $310 on Monday morning.

Not only does the tick chart and market tape underscore $310 as being an important resistance area but even the 1-year daily chart bears this out. Notice how $310 acted as a supporting floor back in April-May prior to gold's final springboard to its 2002 highs near $335. Previous areas of support nearly always act as strong resistance until overcome by prices on a closing basis. Therefore, we must monitor $310 closely on Monday to see whether gold has the strength to overcome it. Overcoming $310 and closing above it would be another positive sign in gold's favor, especially if $310 holds as support over several days without being penetrated. To us, $310 represents the ultimate test as to whether or not gold has any gas left in its tanks or not. Failing to overcome this critical benchmark paves the way for another test of $300-$302.

Turn your attention to the daily chart we mentioned above. Notice that gold successfully (for the time being, at least) tested the Year 2002 bull market trend line at $302 last week, finding support above it. This means that while gold is in a short-term downward slope, its overall trend must still be considered up since this major trend line remains unbroken. Notice also the parabolic bowl in the daily chart. Gold bottomed at almost precisely the mid-point of this parabola, which is another potentially bullish sign. This is typical of bull market corrections since in bear markets prices tend to bottom to the right-of-center of parabolic bowls. In bull markets, prices bottom either left-of-center or dead-center. It's also quite instructive that the 30-week trend line in gold intersected perfectly the bottom of this parabola. This does not necessarily guarantee that gold will continue to trend higher in coming weeks and months; what it does is point to at least temporary technical strength and strong underlying support for the time being. Again, the higher above $310 gold gets the greater the chances are that its recent lows will hold. Breaking above $310 on Monday will not only mean that buyers have absorbed yet another important layer of supply, but by virtue of overcoming the trend line/parabolic dome in the tick chart (see chart above) it means another explosive upward move will commence over the next few days. If gold takes out $310 on Monday it means $312 is next and likely $318 by the end of the week.