(GC) Developing Gold, Silver Strength Could Produce Surprising Gains

Technicals, January 10, 2012; 7:55am

Overnight's gold gains above recent 1630-area resistance detailed in the 240-min chart below reaffirms the past couple weeks' recovery and defines yesterday's 1607.1 low as the latest corrective low and tightest risk parameter this market is now required to fail below to break this rebound and expose a steeper setback or even the resumption of the past five months' major slide. But while this 1607.1 risk parameter is of a minor scale, the implications of the market's ability to sustain gains above this threshold could be very bullish and span weeks or even months.

Taking a step back to consider this market's longer-term footprint, a confluence of factors currently exists to suggest that Aug-Dec's decline from 1892 to 1541 is a complete corrective process and that the secular bull trend in gold prices may be resuming. These factors include:

• a confirmed bullish divergence in momentum shown in the daily log close-only chart above
• the prospect that the Aug-Dec decline is a (textbook) 3-wave and thus corrective wave sequence
• the market's rejection of the exact and Fibonacci minimum (1564) 23.6% retrace of Apr'09 - Aug'11's suspected 3^rd-Wave rally on a weekly log close-only basis below, and
• the lowest bullish sentiment (58%) accorded this market since Dec'08 and a level that has stemmed the past few years' bull-market corrections.

These issues considered, a bullish policy remains advised for shorter-term traders with tighter risk profiles with a failure below 1607.1 required to threaten this view and warrant moving to a neutral/sideline position. Additionally, the technical improvement in this market now warrants longer-term traders to neutralize all previously advised bearish policies and exposure and move to a cautiously bullish position with a failure below 1607.1 also required to warrant defensive measures. But from a longer-term perspective, a failure below 29-Dec's 1540.9 low close is required to negate this broader base/reversal count and reinstate the 5-month downtrend.

The technical condition of the silver market, not surprisingly, is virtually identical to that just detailed above for gold. The 240-min chart below shows overnight's clear and impulsive break above last week's 29.74 high that confirms yesterday's 28.55 low as the latest corrective low and tightest risk parameter this market is now minimally required to fail below to break the developing uptrend and expose a steeper corrective setback or resumption of the past nine months decline. In lieu of at least such sub-28.55 weakness, there's no way to know that this market isn't in the early throes of a major rebuttal to Apr-Dec'11's 49.82 - 26.145 decline or a resumption of the secular bull trend.

The daily log close-only chart above shows this week's confirmation that at least the intermediate-term trend is up. This defines 28-Dec's 27.234 low close as a support level of developing importance and quite possibly the end of a major 3-wave and thus corrective sequence down from Apr'11's 49.82 high shown in the weekly log chart below. The fact that sentiment accorded this market has eroded to its lowest levels since at least Apr'09 would seem to contribute to a broader base/reversal threat following the past couple weeks' recovery.

This said, the daily close-only chart above still shows this market below a ton of former support from the 29.84-to-31.01-range that now must be approached as a major resistant hurdle; hence the importance of a tight but objective risk parameter like 28.55.

In sum, a cautiously bullish policy is advised with former 29.50-to-29.75-range resistance considered new support ahead of further gains and a failure below 28.55 required to threaten this view enough to warrant defensive measures. In lieu of such sub-28.55 weakness, further and possibly significant gains are expected straight away.