Technical Analysis – Gold sells off, correction extends to 200-MA

Anthony Charalambous, XM Investment Research Desk

Over the past few days, gold has aggressively corrected from its all-time high of 2,074.89 after failing to close above the 2,072 level, that being the 423.6% Fibonacci extension of the pullback from 1,765 to 1,670. The yellow metal plummeted below the Ichimoku cloud, taking out the 50- and 100-period simple moving averages (SMAs) in the process. However, the adjustment came to a halt at the 200-period SMA at 1,873, which happens to also be the 50.0% Fibonacci retracement of the up leg from 1,670 to 2,074.89 (ATH).

The plunging of the MACD below its red trigger line with an extension deep into negative territory and the sharp negative bearing of the Ichimoku lines further support this violent move. The turning down of the 50-period SMA also endorses this view. Nonetheless, buying action has intensified at the 200-period SMA, pushing way past the 1,901 barrier and into the 1,930 – 1,939 region. Strong positive signals are also stemming from the RSI and %K line of the stochastic oscillator as they break out of their oversold zones.

If buying interest persists and decisively overcomes the 1,939 barrier, this could send the price towards the 100-period SMA at 1,955 and the section of inside swing lows (1,960 to 1,968). Surpassing this too may reinforce confidence to test the cloud and 50-period SMA currently at 2,001, prior to the 2,015 resistance. In the event the price successfully returns to this area, the 2,050 and 2,062 highs, plus the historic top of 2,074.89, may return to the table.

If sellers manage to steer under the 1,901 low, the critical hardened support area from 1,873 until 1,863 may prove extremely difficult to dive past. Should the bears drive beneath this, negative momentum may accelerate the price towards the 1,845 barrier and the 1,828 to 1,817 support zone, extending back to highs in September of 2011. Another leg lower may rest at the 1,795 base.

Summarizing, gold is extremely volatile at the moment. It is cautiously bullish and has managed to hold above its 200-period SMA, although negative pressures still exist. A break above 1,939 or below 1,863 could accelerate the precious metal in the respective direction.