Gold set up for another rally?

I can hardly believe it, but gold has failed to follow through on the decline from December’s $1228 high, despite the extreme and persistent bullishness leading up to that parabolic top. It’s held tight to $1100 and formed a contracting triangle, while DSI bullishness has dropped to the mid-teens. This is very similar to the set-up in sugar last fall before it blasted off from 0.22 to 0.30 and put in its final high (it trades now around 0.17):

Here’s gold, also in a weekly chart:


What’s interesting about this juncture is that stocks are extremely overbought on the kinds of readings that typically mark at least an intermediate-term top (put:call, sentiment surveys, waning momentum, etc). Since the dollar broke higher last December while stocks were unphased, we’ve seen somewhat of a breakdown of the old correlations (dollar and yen vs. everything else).

If the PM complex does levitate as stocks decline, it would resemble the action in early 2008. After panic and the deflation trade gathered some steam, the metals eventually succumbed. Here is the GDX mining stock ETF in blue vs. the S&P 500 in red:

Yahoo! Finance