Gold is following the script

Two weeks ago, I wrote, "Gold has retraced a bit more than 50% of its recent decline. Typically we should see a retest of the prior low, with gold price retreating to the 1350-1400 level."

At $1367, gold is now just about smack-dab in the middle of that 1350-1400 range.

 Source: Finviz.com

Gold thus far has more or less followed the script when it comes to what often happens after a fairly massive and abrupt technical breakdown. Price typically rallies off the climatic low, retracing about 50% of the decline ("filling the gap"), but then rolls over and retreats back towards the prior low (a retest). 

The price of gold should hold above the prior low level of approximately 1350 for the chart to remain constructive. It should build a base within this 1350-1400 range before looking to resume its ascent. However, if gold breaches the 1350 level and hits new lows, all bets are off as the next level off support appears to be around 1200. 

Two things I'd like to point out in gold's weekly chart:

Source: Stockcharts.com

 

The first is notice the huge volume spikes. Often such extreme levels of volume can indicate climatic turning points, either to the upside or downside -- "blow-off" tops or bottoms, as they're often called. There is what appears to be a climatic, high-volume top in 2011, and more recently this year what appears to be a climatic, high-volume low. As discussed, it has yet to be determined if this low will hold, but nonetheless for now it does have much of the markings of a significant low.

The other thing I'd point out in the chart is the many hammer candlestick patterns (in green boxes). When these occur after price declines, they very often identify the likelihood of a trend reversal, a bullish indication. Note in the chart when such hammers have appeared after price retreats, more often than not the trend has reversed and a rally -- albeit widely varying in duration -- has ensued.

Again, the jury is still out on what gold will do from here, but it's clear that right now the metal is at a key juncture.