By: Kira McCaffrey
August 19, 2013
The next few weeks could be explosive for gold. If the Fed doesn’t taper in September there will be “disappointment” registered in the U.S. dollar. Greenback weakness would in turn be bullish for gold. Also, on the horizon over the next few months lies a series of U.S. fiscal challenges including the debt ceiling, the budget and continuing resolution issues. These all could potentially provide bullish fodder for gold.
Technically, to break the current minor uptrend pattern, December gold would need to close under the August 14 low at $1,315.10. If that level remains intact near term, gold could prove to be a “buy the dip” trade in the days and weeks ahead.
Let’s hone in on Monday morning action. Comex December gold futures are overbought on both a daily and intraday basis. A minor downtrend has developed on the hourly chart as early position squaring is weighing on gold amid quiet, illiquid markets.
Important near term support lies at $1,357, Friday’s low, which emerges as an important intraday technical floor on the hourly chart (see Figure 1 below). If that level were to give way near term, it would open the door for a more substantial corrective decline.
Taking a look at the bigger picture, the technical trend on a multi-week basis is bullish for gold. Since late June, Comex December gold futures have carved out a minor bottom on the daily chart, and initiated a minor uptrend phase, with a clear series of higher daily highs and higher daily lows.
The moving average picture has improved in recent weeks, which has encouraged short and medium term trend following traders to turn bullish on gold. A bullish moving average crossover signal is in play with the 20-day rising above the 40-day moving average recently.
From a pattern perspective, the market has confirmed a sloppy and lopsided inverted head and shoulders bottom pattern on the daily chart, which projects potential gains back toward the early May high at $1,490.50.
Near term, there are a series of minor resistance ceilings for traders to monitor including psychological resistance at $1,400, the early June peak at $1,426—that is the gateway to a retest of the $1,490/1,500 level in the days and weeks ahead.
Finally, action in the U.S. dollar index in recent months has been supportive to gold as the dollar has been drifting lower in a defined downtrend. Key short-term levels to watch in the U.S. dollar index this week include initial support at 81.04 and then 80.86. Declines under the latter level—80.86, the early August swing low, would be a bearish trigger and would unleash a fresh selling wave in the dollar.
The next downside target is seen at 80.50, the mid June and an important swing low. If the U.S. dollar breaks out below those support floors it would support the next upleg in gold.