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Recent Rally in Gold: Significant Improvement or Just a Bigger Pullback?

By Przemyslaw Radomski, CFA

Last week gold rose to its highest level since mid-May as possible military action against Syria prompted safe-haven buying. Itís worth noting that the yellow metal gained over $250 an ounce from its June low of $1,180.71, but in spite of this growth it is still down about 17 percent for the year.

According to Reuters, gold gave up some gains after British lawmakers voted against any involvement. Additionally, over the weekend President Obama stepped back from the brink and delayed an imminent military strike against Syria to seek approval from the U.S. Congress. Our take is that it wonít happen anytime soon. You will find more details about this issue, and extensive coverage of the crude oil market in our yesterdayís Oil Update.

As the prospect of imminent attacks on Syria receded, gold extended losses and dropped below $1,400 an ounce on Friday. Will this drop trigger further dips?

In order to answer this question, weíll need to examine goldís charts to find out what the current situation in the yellow metal is. We also take a closer look at the US Dollar Index and the Euro Index to find out what impact they could have on future price of the yellow metal. Could they drive gold prices lower in the near term?

LetĎs start todayís analysis with the US Dollar Index long-term chart (charts courtesy by http://stockcharts.com).

Quoting our essay on gold, dollar and mining stocks on August 28:

The situation in the long-term chart hasnít changed much recently. The breakout above the declining support/resistance line (currently close to 79) hasnít been invalidated and, from this perspective, the situation remains bullish.

Now, letís examine the weekly chart.

Despite the fact that the USD Index declined once again last week, the medium-term support line was not breached. Although we saw a small move below the upper support line, even this small breakdown was quickly invalidated, which is a bullish signal. These positive circumstances encouraged buyers to act and the dollar came back above the 82 level.

From this perspective, the medium-term uptrend is not threatened, and the situation remains bullish. Therefore, we can expect the dollar to strengthen further in the coming weeks. Looking at the above chart, it seems that the USD Index has started its rally and that this rally will be fueling declines in the precious metals market.

Now, letís check the short-term outlook.

From this perspective, we see that the recent decline once again took the USD Index below the 61.8% Fibonacci retracement level based on the entire February Ė July rally.

Despite this decline, buyers managed to push the USD Index higher, and the short-term breakdown below the Fibonacci retracement level was invalidated.

When we take a closer look at the daily chart, we see a small inverse head and shoulders pattern underway (based on three August lows). As you see on the above chart, the U.S. currency has moved higher in the recent days and broke above the 82 level, which means that this bullish formation is confirmed.

Additionally, when we factor in the cyclical turning point (which weíre seeing after a monthly decline), the outlook here looks very bullish. In fact, from this perspective, we see that the USD Index already started to move higher right at the turning point.

Once we know the current situation in the US Dollar Index, letís now take a look at the Euro Index.

On the above chart, we see that the Euro Index attempted to move above the 200-week moving average in the previous week, but this attempt failed for the second time, and the breakout was invalidated.

Looking at the above chart we clearly see that the European currency dropped below the 61.8% Fibonacci retracement level based on the January - July decline. At this time we also see an invalidation of the breakout above the declining support/resistance line based on the January and June highs, which is also a bearish factor.

Letís take a look at the gold market.

On the long-term gold chart, we see that the yellow metal has climbed up once again and reached the previously-broken rising support/resistance line based on the July 2005 low and the October 2008 bottom (on an intraday basis). At this point, itís worth noting that this area is strengthened by the 38.2% Fibonacci retracement level based on the September 2012 - June 2013 decline. Although gold broke above this resistance zone at the beginning of the previous week, the breakout was invalidated in the recent days and the yellow metal dropped below $1,400 an ounce. On Tuesday we saw another attempt to move above the resistance levels, but gold didnít even reach them.

From this perspective, the medium-term downtrend remains in place.

Now, letís take a look at the medium-term picture to see more details.

On the above chart, we see that gold continued its rally in the previous week and reached the 61.8% Fibonacci retracement level based on the entire April-June decline. Although the price of gold managed to break above its June top, this breakout was quickly invalidated.

Additionally, when we factor in the Fibonacci price projections, we see that the recent rally from the August 7 low to the August top is similar to the upward move seen in July. If history repeats itself, we will see a downward move Ė similar to the July-August decline.

From this point of view, it seems that the strong resistance range based on the June top and the 61.8% Fibonacci retracement level will keep the rally in check as it further strengthens the resistance created by the rising long-term line marked in red on the previous (long-term) chart.

Summing up, in the recent days the Euro Index has declined back below the declining red support line, which makes the outlook for the USD Index even more bullish. These circumstances will likely have bearish implications for the precious metals sector. With a bullish outlook in place for the dollar, it doesnít seem likely that gold will have enough strength to move above the previously mentioned resistance levels. Therefore, despite the recent show of strength, the medium-term outlook for gold remains bearish.

To make sure that you are notified once the new features are implemented, and get immediate access to our free thoughts on the market, including information not available publicly, we urge you to sign up for our free gold newsletter. Sign up today and you'll also get free, 7-day access to the Premium Sections on our website, including valuable tools and charts dedicated to serious Precious Metals Investors and Traders along with our 14 best gold investment practices. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Gold & Silver Investment & Trading Website - SunshineProfits.com

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About Sunshine Profits

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 
 
 
 

 
 

 

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