Gold – The Breakout Must Hold

The downside reversal in the U.S. Dollar during the past two weeks has put a bid under the U.S. gold price. However, the Dollar has become oversold on a daily basis and it is imperative that gold hold $1230 or we will likely see a quick decline to test the May lows of $1166.

The Cup and Handle Pattern is common in gold. This pattern occurs when you have a correction followed by a test of the high and a smaller correction followed by a breakout. The initial rally following a successful breakout measures 61.8% of the height of the base. It currently exists in both the hourly and daily charts with respective measurements of $1300 and $1380.

Since 2007 we have seen numerous Cup and Handle patterns in gold that met their initial .618 goals before pulling back to the breakouts:

• Monthly chart of 1980-2007
• May 2006 to September 2007
• March 2008 to September 2009

Previous successful examples in gold

Three important failures

While daily sentiment is at 93% and 95% for gold and silver respectively (www.trade- futures.com ), the weekly sentiment figures are in neutral territory for both. This leads to a conclusion of a possibility of a short term decline within an ongoing bull market.