The past couple of weeks, however, have witnessed a bottoming process and an attempt at gathering strength for an oversold rally, the first real rally since the November-January decline.

The XAU index closed up over 2% on Friday at 95.06 and more importantly above its 15-day moving average to send an immediate-term buy signal. The XAU also broke out above a 2-month downtrend line.

The above daily chart of the XAU index shows a developing parabolic bowl-shaped pattern that looks to have enough strength to carry XAU up to the psychological 100-102 resistance area and possibly higher. The 100-102 area will mark an important test for the index as it will show whether there is enough internal strength to overcome the 50% retracement level from the November highs. As you can also see from this chart it's also an important reaction level from the past three months.

The close above the recent downtrend line is bullish; however, this doesn't guarantee the XAU will ride straight up as it may take a few days to reverse the trend of this moving average. Yet even during this phase the XAU should at least have enough buoyancy to keep it afloat above its recent lows. The next important test for the index will be the 30-day moving average, which currently intersects the 96.50 area. I believe this level will be tested and overcome. This will then lead to the far more important test of the psychological 100 level where the 90-day moving average intersects in the daily chart and a major resistance area.

January 23, 2005

Clif Droke is the editor of the 3-times weekly Momentum Strategies Report, a forecast of U.S. equities and markets. He is also the author of more than 20 financial books, including most recently "Channel Buster! How to Trade the Most Profitable Chart Pattern." For free samples of his work, visit www.clifdroke.com