The gold price has enjoyed a strong rise since its lows of $1161 in August, hitting $1299 on Friday. Having subsequently dipped to $1276, the precious metal, currently $1292, may again be climbing to test resistance.
The Relative Strength Index (RSI) signalled gold was overbought, with the price peaking out as the RSI met a trend line formed from the previous two RSI peaks. A trend line of RSI support also held strong as gold retraced to $1276 before bouncing. The resistance zone between $1296-$1308 should prove to be strong - the area has been subject to considerable consolidation during the summer of 2018, as well as it being a previous area of repeated support during the six months prior to that.
With the RSI again warming up, and significant resistance ahead, it seems likely a deeper retracement is on the cards. However, a distinctive Cup and Handle pattern has been forming since June. This notorious pattern often results in a break to the upside. If the pattern follows protocol, a ‘handle’ shape should appear to form with lower price action before a bigger move upwards should it break out of the pattern. It’s also worth noting that the 50 Day Moving Average (DMA) moved higher than the 200 DMA a week ago. This event, called a ‘Golden Cross’ is regarded as a bullish signal.
At this moment in time it’s possible that the Cup section of the Cup and Handle pattern is still forming but the top of the pattern isn’t required to be completely horizontal – we will know soon enough if it fails to close higher. A potential outcome that would fit all observations might be a retracement to the $1260 area which appears to be a logical level of support and still allows a typical Cup and Handle formation to complete – generally speaking the handle should not drop into the lower half of the cup and should ideally stay in the upper third. In the event price action moves positively into the resistance zone it will be worth keeping an eye on the RSI for further indications of exhaustion from buyers.
A lower dollar is generally positive for most commodity prices. The Dollar’s climb through 2018 will have contributed to the drop in the gold price, and its recent pullback has boosted golds reversal. In the last few days of 2018, the US Dollar Index indicated it had peaked – at least for now – falling out of a barish Rising Wedge pattern (shown in red). Although not always the case, this pattern often results in a strong move down, sometimes as much as the height of the pattern. Immediate levels of support can be found around 94.50 and 93.50.
The recent pullbacks across global markets, increased volatility, and a decreasing dollar will have contributed to gold’s recent bullish run, but if markets start to settle and confidence returns, the gold price rally may start to falter. A successful breach of the resistance zone at $1308 will likely require the winds of fear to continue blowing or the Dollar to give back more of the ground it made up last year.
Author: Stuart Langelaan