The precious commodity has had a very rough several weeks, tumbling nearly 200 dollars per troy ounce in the wake of the recent vaccine optimism. The reinvigorated investors and traders' enthusiasm catalysed the major selloff, as the global demand for safe-havens and other low-risk securities plummeted. The market is currently riding high on the expectations for a sharp rebound in global economic activity in 2021, but it is yet to come to terms with the realisation that it will take time before there can be worldwide vaccination.
The market could very well be getting ahead of itself, but eventually, traders and investors need to come to grips with the fact that no vaccine can be a substitute for lost productivity. Despite some notable improvements, the underlying economic situation is not yet as optimistic as it might seem at first glance.
Global manufacturing output is sinking across the board with China being a notable exception. Meanwhile, consumer confidence is recoiling in the Eurozone as well as in the US. French and German industries were hit unevenly in October, whereas Canada's economic growth was stymied in November.
All of these developments are evocative of mixed and uneven global recovery, which leaves a lot of the uncertainty that drove the last gold rally still mostly in effect. This means that gold's appeal should not be automatically written off due to the considerable hopes that are vested in an upcoming vaccine or vaccines.
Moreover, the end of December is typically characterised with low levels of liquidity as general trading activity falters around the holidays. Such a murky environment provides the ideal conditions for gold to shine, as traders seek refuge to hedge against heightened risks stemming from these low levels of liquidity.
The overall situation of gold continues to be looking ostensibly bearish, but there are definite conditions that could very likely reinvigorate the interest for the king of the safe-havens. That is why today's analysis examines the make-it-or-break-it scenario that the precious commodity is currently finding itself in.
As can be seen on the daily chart below, gold had been consolidating in a range roughly between the 23.6 per cent Fibonacci at 1927.24 and the 38.2 per cent Fibonacci at 1836.28 since mid-August. This was the case until recently when a notable breakdown was established on the 24th of November. Depending on whether this pans out to be a decisive breakdown or a fakedown, the price action could either establish a new downtrend or rebound back towards the 23.6 per cent Fibonacci.
As regards the arguments in favour of a rebound, there are several of them that warrant closer examination. The price action has recently developed a 'Morning Star' pattern, which is typically found at the lower end of a recent downtrend and is taken to entail a likely bullish reversal. The dip of the star coincides with the lower end of a downwards-sloping regression channel, which in itself is expected to prompt such a rebound.
Furthermore, the ADX indicator crossed above the 25-point benchmark on the 25th of November, which technically means that the market is currently trending. Nevertheless, it should be emphasised that the transition from the previous range-trading environment is still fairly new, which means that the continuation of the newly emerging trend is far from being certain. Quite the contrary, the 'Oversold' Stochastic RSI indicator also favours a rebound in demand for gold.
On the other hand, the recent uptick of the price could very likely turn out to be a minor bullish pullback, as a part of the broader downtrend that is currently emerging. The breakdown below the 38.2 per cent Fibonacci was a major stepping stone, so it is only natural to expect subsequent bullish ripples. Even still, this Fibonacci retracement has now adopted the new role of a prominent resistance. That is why the price could continue tumbling, given that it currently coincides with the middle line of the regression channel.
If the former scenario turns out to be correct, provided that the price action manages to break back above the 38.2 per cent Fibonacci and the middle line of the channel, it could once again attempt to upsurge towards the 23.6 per cent Fibonacci. Conversely, if the latter scenario unfolds next, then following the termination of the bullish correction, probably around the 38.2 per cent Fibonacci, the subsequent development of the downtrend could be continued towards the next psychological barrier – the 61.8 per cent Fibonacci at 1690.36.
The 4H chart above follows the behaviour of the last downswing and examines its most prominent stages closely. As can be seen, the four subsequent tests (blue ellipses) of the area around 1860.00 have underpinned the existence of a strong support (now resistance) level there. So, the market would have a difficult time in breaking out above 1860.00, and that is why both bears and bulls need to observe the behaviour of the price action around the 1860.00 mark.
While the three moving averages follow the current 'Perfect Descending Order' – the 20-day MA (in red) trading below the 50-day MA (in green), which is trading below the 100-day MA (in blue) – the continuation of the underlying bearish sentiment would be confirmed. Nevertheless, there are definite signs of a potential trend reversal.
The snap rebound above the psychologically significant 1800.00 level followed by a consolidation of the price action above the 50-day MA, are both indications of the strengthening of the short-term bullish pressure.
Market bears would be looking to implement trend-continuation trading strategies, if the price action rebounds from the 38.2 per cent Fibonacci and the 100-day MA. Conversely, the bulls would be looking for bullish confirmation if the price action manages to break out above 1860.00.
As can be seen on the hourly chart below, the price action is indeed trying to establish a complete trend reversal – from the previously strong bearish pressure, undergoing through the consolidation stage, to the presently rising bullish pressure. While this does not necessarily imply that the price action is bound to continue appreciating in the immediate future, certain developments can be monitored closely.
The price action is currently having its first go at breaking out above the 38.2 per cent Fibonacci, and everything would depend on whether or not this turns out to be a fakeout. If the price reverts itself back below this level, it will entail the probable continuation of the broader bearish trend. Moreover, even if the price climbs to the aforementioned 1860.00 resistance before reverting itself, the bears would still have the possibility to use trend-continuation strategies.
Conversely, the concentration of the price action in a temporary range between 1860.00 and 1836.28 would allow the bulls to seek favourable entry. They should not do so immediately, however, as joining at the mid-point of an existing upswing would make them vulnerable to erratic fluctuations. Rather, they can sit and wait to see just how low the next bearish correction goes. They need to be certain that the following bearish correction is not actually a continuation of the broader downtrend.
At present, both bears and bulls (who do not have open positions) would be better off to sit and wait to see how the market behaves next. Once the current bullish pressure (in the short-term) is exhausted, the market is likely to establish a bearish correction afterwards. Depending on how low the price sinks to next – below or above the 38.2 per cent Fibonacci - would demonstrate whether or not the market would continue climbing afterwards.
Gold's price action quite unsurprisingly reached the next most significant resistance area around 1870.00, which was highlighted in the last analysis of the precious commodity. The latest upswing was being driven by heightened vaccine optimism, which continues to be the biggest driver across different markets.
Judging by the latest behaviour of gold's price action, however, it looks as though the safe-haven might be ready to take a breather from the turbulent past several weeks, and probably establish a minor bearish correction. Consequently, this will open up possibilities for traders to use contrarian trading strategies.
The time seems right for gold's bullish rally to be temporarily suspended, given the mostly uneventful week ahead. Contrarian trading is, by definition, entailing more risk than, say, trend-continuation trading, which is why it is not suitable for highly risk-averse traders. Moreover, contrarian trading of such kind focuses on much smaller price swings, which are expected to unfold in the near future.
There is, however, something for the more longer-term oriented traders in this setup also. They would have to wait and see where such a bearish correction would bottom out. The expected correction would still play a prominent part in the broader bullish trend, so unless a substantial breakdown unfolds next, the bulls would have a chance to place trend-continuation buying orders around such a dip. At any rate, it would be better for them to wait for an opportunity to enter long at a discount, rather than buying in near the latest swing high.
As can be seen on the 4H chart above, the price of gold appears to be consolidating just below the major resistance at 1875.00, whose significance was underscored in the initial analysis. For the time being the price action is failing to break out above it, which increases the likelihood for the development of a bearish correction.
The most likely target level for such a correction would be the 38.2 per cent Fibonacci retracement level at 1836.28, which is currently serving the role of a prominent support level. Hence, trend-continuation traders can look for an opportunity to go long around it.
Keep in mind though, that if the price action breaks down below the Fibonacci support, this will clear the way for the price action to continue plummeting towards the psychologically significant support level at 1800.00. Such a course of action would be inlined with the forecasts of the initial analysis.
As can also be seen, the price action broke out above the upper border of the descending channel during its last test of the major resistance at 1875.00, which represents yet another reason as to why the market might be due for a healthy bearish correction.
Finally, it should also be mentioned that the 20-day MA (in red) has already crossed above the 50-day MA (in green) and the 100-day MA (in blue), as indicated by the two flags on the chart. This implies heightened bullish commitment in the short-term. Nevertheless, the 50-day MA continues to be positioned below the 100-day MA, which means that despite the recent upsurge, the longer-term sentiment remains prevailingly bearish. This is not only preferable for the establishment of a minor correction, but it could also prompt the development of a more significant downtrend below the 38.2 per cent Fibonacci. That is something that the bulls need to be aware of.
The market for low-risk securities and other safe-haven assets is sending away its most turbulent year in recent history. At any rate, the on and off upsurges in the underlying demand for gold, as a tool for hedging the risks associated with Covid-19 uncertainty, has reached levels that were last seen in the wake of the 2008 credit crunch.
The rollercoaster of a year saw the price of gold being swept away by the initial coronavirus crash in March, followed by a massive rebound. The price of the precious commodity gained significant ground subsequently, which led to its current plateau.
Despite the recently observed positive momentum, the asset currently finds itself in a difficult to make out midpoint, which is a part of the broader uptrend's development. On the one hand, the positive industrial numbers from Europe that were released earlier today seem likely to reduce the aggregate demand for the kind of the safe-havens, as the uncertainty surrounding the prospects for a global recovery is lessened.
On the other, the anticipations for a greatly diminished market liquidity levels around this year's festive period are likely to prompt revived interest amongst investors seeking to hedge their portfolios.
Meanwhile, the underlying technical outlook seems to expound upon these two varying possibilities. As can be seen on the 4H chart above, the price action appears to be in the process of developing a 1-5 impulse wave pattern, as postulated by the Elliott Wave Theory. When examined in conjunction with the MACD indicator, this seems to underscore the rising bullish bias.
Moreover, the latest dip that was established at the bottom of the 1-2 retracement leg rebounded from the second band of the fan tool as well as from the 100-day MA (in purple). Both of these developments substantiate the expectations for the continuation of the recent upswing's development towards establishing the second impulse leg (2-3). In order for such a peak to be established, potentially near the psychologically significant resistance level at 1900.00, a decisive breakout above the major resistance at 1875.00 needs to take place first.
Conversely, if the price action fails such a test of the underlying bullish commitment and it does rebound from 1875.00, such a turn of events could entail the emergence of a new Double Top pattern. Double tops typically signify rising bearish bias, which could cause the establishment of a new dropdown. Such a pattern would have the 23.6 per cent Fibonacci retracement level at 1836.28 as its Neckline. Hence, another breakdown below it would underpin the likely emergence of a new and massive downtrend, as opposed to an interim bearish correction.
Both market bulls and bears need to observe the behaviour of the price action around this crucial resistance carefully, as it would likely indicate the next direction for gold's price action.
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