False Breakdown In Gold Shares

Richard Wyckoff made millions by being able to recognize false breakouts and breakdowns. He recognized that relative volume was the key to this recognition. A breakout from significant resistance (or support) on contracting volume increased the probability that price would return to the previous trading range once short-term momentum broke.

Wyckoff would classify recent action in gold shares as a false break down. The gold shares generated a climax bottom on October 4th on 29.6 million shares. This bottom has been tested twice. The first test came on December 29th on 12.1 million shares or 59% contraction in volume. The second test and marginal new lows came yesterday on 24.3 million shares or 18% contraction in volume. Wyckoff would have recognized this setup (shrinking volume at critical support) as waning selling pressure. He also recognized that if price couldn't break support (or resistance) with force or what he described as a sign of strength (or weakness) while "jumping the creek" or "breaking the ice", it would likely reverse and attempt to break resistance (or support) with force.

A growing number of emails alluding to an imminent blood-bath in the gold shares suggest an emotional trend. Although waning selling pressure at critical support increases the probability of an unexpected price reversal in the near future, it will likely be ignored as random trend noise by emotional driven investors. It's amazing that despite amazing technological achievements in trading how little the markets have changed since the bucket shops of the early 1900's.

Chart 1: Gold Miners Index (GDX):