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Gold Prices Are Still Bearish; But Very Oversold

Technicals | Dec 22 2016

The direction of the price of gold is now linked to the direction of US interest rates, says James Stanley, Currency Strategist, FXCM.

By James Stanley, Currency Strategist, FXCM

-Gold Technical Strategy: Bearish, and will likely remain as such until/if we see the Fed soften their stance.
-Gold prices have attempted to establish support since our last article, building a short-term bear-flag; but sellers have remained active, offering prices lower as resistance gets tested.
-For oversold metrics, weekly RSI is at 30 and Daily RSI is below-30; be careful of chasing the trend-lower here.

In our last article, we looked at the continued down-trend in Gold prices. And as we said, if the bullish thesis for Gold prices hadn’t completely died already; it was on its way. And this is unlikely to change as long the Federal Reserve remains hawkish. Dollar strength has become a pervasive theme, and this will likely persist as the Fed is one of the lone major Central Banks looking at tighter policy options.

Of course, this does come with risks; and we heard Chair Yellen mention those risks last January when she said that un-checked USD-strength could potentially create issues in the American economy as exporters may begin to face pressure in foreign markets. And if the U.S. is one of the few economies actively looking to raise rates, this could expose the Greenback to considerable capital flows; thereby driving the currency even-stronger. But given Chair Yellen’s positivity at the last FOMC meeting, it doesn’t appear that this is a major concern at the moment so we’re probably not yet near an area where the Fed is looking to soften their stance towards rate hikes in 2017, 2018 and 2019. This could continue to drive pressure into Gold prices, so traders would likely want to retain a bearish stance until something in the underlying conditions change.

Now, with that being said, Gold prices are exhibiting tendencies of a deeply over-sold market. The short-term bear-flag with an aggressive up-ward sloping angle (showed up last week, shown below) is indicative of a market that was lacking sellers, at least until resistance came into-play. And while sellers did return when price action approached resistance in the $1,142-$1,144 area, they were scant to be found on the move-higher off of support at $1,122 to $1,142. Perhaps more disconcerting – with so many tests of this area of resistance, how much longer might it hold? This could lead to a ‘blow off’ move that could volley price action-higher, at least temporarily, as sellers relent off of this zone of resistance at $1,142-$1,144.

This means that traders will likely want to be a bit more careful with these short-term resistance swings and, instead, look for a deeper resistance level to plot bearish continuation entries. One such level exists at $1,150, as this is the 23.6% Fibonacci retracement of the May 2013 high to the December 2015 low.

 — Written by James Stanley, Strategist for

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