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Monday, May 14, 2012 2:48:45 PM
Technical Trading: The Week Ahead - Gold Nearing Test of Major Support
14 May 2012, 12:00 p.m.
By Kitco News
(Kitco News) - Mon May 14—June Comex gold futures are hurtling towards a retest of major technical chart support at the December 2011 low at $1,528. Daily momentum tools are deeply oversold, which opens the door to the possibility of a reversal higher.
Since late February, June gold futures have been edging lower in a mild daily downtrend, still within the context of the larger longer-term secular bull market. Over the past week, however, the pace of the declines have accelerated and the bearish forces are focused on a retest of the five-month low at $1,528 per ounce.
Daily momentum tools, such as the 9-day relative strength index (RSI), are at deeply oversold levels. That indicator is currently at 19%, below the 30% oversold line. Markets can trade at oversold or overbought levels for weeks or even months during extremely strong trends, but the oversold level also puts the bears on notice for a potential reversal or snapback move.
Interestingly, the last time the 9-day RSI was at the 19% level was in mid December—just prior to the spike low to $1,528 on December 29. At that time a bullish divergence formed on the momentum indicator and prices rallied higher.
Any approach and test of the December low will be critical for the gold market near term. A sustained a sharp decline below $1,528 would break the intermediate term neutral trend and turn the medium term trend bearish. Declines of several hundred dollars per ounce could be targeted if that were to unfold.
Conversely, this major support level at $1,528 could offer a stalling point and a floor for the recent gold market declines. It is a crucial zone for traders to monitor near term.
Terry Gabriel, global head of technical analysis at Ideaglobal in New York said, "on a technical basis, it does look like we will test the December 2011 low at $1,528. But, the market is oversold and ripe for a reactionary bounce at any time."
On the upside, Gabriel highlighted resistance at the $1,613-1,627 zone. That is the level the bulls would need to conquer near term to shift the negative daily trend. "If gold were to reverse above $1,627 that would return us to the range of the past two month's highs in the upper 1600s. Right now that looks like a low probability," he said.
Just below the $1,528 low, Gabriel identified a longer-term Fibonacci retracement support at $1,514. That represents 38.2% of the January 2009-September 2011 rally, he said. If the $1,514 level were to crack "the risk would be for a decline which would be very severe."
If the $1,514 floor were to give way, that could open the door for a longer-term sell-off toward the $1,386 zone, which represents 50% of the above mentioned 2009-2011 rally.
However, Gabriel warned of the possibility of a snapback reversal higher trade. There is a possibility of a "marginal new low [below $1,528] and then a strong snapback," he said. That action would be similar to the December 2011 low which took out the September 2011 low marginally but then formed a major five-month bottom for gold.
Bottom line, though the trend is your friend, and the near term technicals point down for gold. "The technical picture is still negative until we see some form of base or reversal above resistance the market should remain under pressure," he concluded.
14 May 2012, 12:00 p.m.
By Kitco News
(Kitco News) - Mon May 14—June Comex gold futures are hurtling towards a retest of major technical chart support at the December 2011 low at $1,528. Daily momentum tools are deeply oversold, which opens the door to the possibility of a reversal higher.
Since late February, June gold futures have been edging lower in a mild daily downtrend, still within the context of the larger longer-term secular bull market. Over the past week, however, the pace of the declines have accelerated and the bearish forces are focused on a retest of the five-month low at $1,528 per ounce.
Daily momentum tools, such as the 9-day relative strength index (RSI), are at deeply oversold levels. That indicator is currently at 19%, below the 30% oversold line. Markets can trade at oversold or overbought levels for weeks or even months during extremely strong trends, but the oversold level also puts the bears on notice for a potential reversal or snapback move.
Interestingly, the last time the 9-day RSI was at the 19% level was in mid December—just prior to the spike low to $1,528 on December 29. At that time a bullish divergence formed on the momentum indicator and prices rallied higher.
Any approach and test of the December low will be critical for the gold market near term. A sustained a sharp decline below $1,528 would break the intermediate term neutral trend and turn the medium term trend bearish. Declines of several hundred dollars per ounce could be targeted if that were to unfold.
Conversely, this major support level at $1,528 could offer a stalling point and a floor for the recent gold market declines. It is a crucial zone for traders to monitor near term.
Terry Gabriel, global head of technical analysis at Ideaglobal in New York said, "on a technical basis, it does look like we will test the December 2011 low at $1,528. But, the market is oversold and ripe for a reactionary bounce at any time."
On the upside, Gabriel highlighted resistance at the $1,613-1,627 zone. That is the level the bulls would need to conquer near term to shift the negative daily trend. "If gold were to reverse above $1,627 that would return us to the range of the past two month's highs in the upper 1600s. Right now that looks like a low probability," he said.
Just below the $1,528 low, Gabriel identified a longer-term Fibonacci retracement support at $1,514. That represents 38.2% of the January 2009-September 2011 rally, he said. If the $1,514 level were to crack "the risk would be for a decline which would be very severe."
If the $1,514 floor were to give way, that could open the door for a longer-term sell-off toward the $1,386 zone, which represents 50% of the above mentioned 2009-2011 rally.
However, Gabriel warned of the possibility of a snapback reversal higher trade. There is a possibility of a "marginal new low [below $1,528] and then a strong snapback," he said. That action would be similar to the December 2011 low which took out the September 2011 low marginally but then formed a major five-month bottom for gold.
Bottom line, though the trend is your friend, and the near term technicals point down for gold. "The technical picture is still negative until we see some form of base or reversal above resistance the market should remain under pressure," he concluded.
