- Dugald Malcolm, Montreal, Canada

Since July 28th, gold has had a remarkable run. In the last 18 days of trading, gold has closed higher for 15 of them. This impressive rally comes after an 8.6% pullback by the yellow metal. The pullback brought the price of gold down from its June 21st all time high of $1,265.00 an ounce to $1,155.90 on July 28th.

The pullback got many investors nervous, wondering if the ‘bubble’ had finally burst for gold’s exceptional bull market that has been in effect since 2001. The accelerated short-term upward trend line was being threatened and, like so many times before when gold makes any sort of a pullback, the inevitable cries of “the sky is falling” start to be heard from journalists, talking heads and bloggers alike. As you can see by the chart below, however, gold’s bull market remains very much intact:

In taking a closer look at the pullback, we can see that a classic technical pattern took place in the form of a Falling Wedge. A Falling Wedge is a bullish pattern defined by Robert D. Edwards and John Magee’s Technical Analysis of Stock Trends (the technical analysis Bible) as:

“An Area Pattern with two downward slanting, converging trendlines [...] The anticipated direction of the breakout in a Falling Wedge is up.”

Sure enough, at the beginning of August the breakout occurred after gold prices bounced off of support at the 200-day moving average. Technical Analysis of Stock Trends also suggest that the proceeding breakout move typically retraces all the ground that was lost in the formation of the wedge. This would mean that we can see gold moving back up to and retesting its all time high of $1,265 in the near future.

Other technical indicators also flashed green near the time of the breakout of gold from its Falling Wedge. Both the RSI and MACD also broke out of downward trend lines in place since mid-May.

The resistance level of $1,265 might not prove to be strong enough to hold gold’s rise in price if historical seasonal gold prices are any indicators. Typically, gold demand is strongest going into the fourth quarter as India, the world’s biggest gold consumer, celebrates harvest and begins its wedding season. If seasonal strength plays out again we could see gold continue to move higher and hit new highs in September before cooling down and consolidating  in October.

As mentioned, levels to keep an eye on are resistance levels at $1,265 and, if seasonal strength does not play out in 2010, one should keep an eye on the $1,160 area, close to the 200-day moving average, as an area of support.