Pro: The Level of Truth for Gold

If the stock market continues to move higher, gold could continue to struggle.

In the last couple of days, we have identified a important correlation between the two. When the S&P 500 index plunged from 1,524 to 1,484 on February 25, we noticed a rush for safe havens, including bonds, the U.S. dollar, the yen and finally, gold.

(Read More: Gold On Track for Record Monthly Losses)

Gold had been in an oversold condition, selling off over $100 in the last couple of weeks. Still, the key support of $1,530 has held, giving gold traders a good area of support to buy against. If gold continues to hold onto the $1,530 level, I think the upside target is about $1,660, which is the upper band of its channel.

(Read More: As Fed Defends QE, Traders Get Bullish on Gold)

Source: World Gold Council

On Wednesday night, gold found itself consolidating at major $1,594.5 to $1,596.5 support late in the day, and was able to trade slightly higher overnight, reaching a high of $1,602 before trading nearly $20 lower to $1,585.3. As the market struggled to hold above $1,600, and just below major resistance at $1,605, selling came in and the market found the path of least resistance was to the downside.

So far we have seen support against the $1,585 to $1,588 Tuesday's low. The market is searching for a bottom, but with price action more than $30 from Tuesday's quick high, a failure to close at a minimum above $1,580 will be very bearish. Look for a move back into the $1,594.5 to $1,596.5 area to negate this early weakness.

Bottom line: Bulls badly need yearly lows to hold.

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