The Hindu Business Line : Spot gold may test support level

GOLD prices fell to its lowest in more than three months on back of reports that the European central Bank was ready to intervene in the markets to slow the Euro's unstoppable rise against the dollar.

This was prior to calls from the German chancellor, Mr Schroeder, asking the ECB to "intensively" consider rate cuts to counter the strength of Euro. Even remarks by the Federal Reserve Chairman, Mr Alan Greenspan, before the US House of Representatives budget committee that the US could not grow itself out of its budget deficit, which has seen the dollar depreciate on world markets, did nothing to slow the greenback.

Gold has till now tagged the movements of the dollar against other currencies, mainly the Euro, with the gold prices jumping to a 15 year high. Further weakness in the dollar will renew buying interest in the metal. There was some recovery seen last week when the dollar was hit by a less optimistic view of the economy coupled with the latest warning of attacks on the US by the Al Qaeda which fuelled a safe-haven back drop for gold buying.

Gold prices are struggling to find direction with support at $394.85 finally giving way. Resistance at $416.50 was quite strong and as mentioned in our previous up date, support at $405-407 will be crucial and a close below that will risk the possibility of a test towards the $390 levels again.

Next crucial level will be at $390 which is also a long term rising trend line resistance point. The fibonnaci 38.2 per cent retracement point at $387 will also be an important support point for the move from $318.75 to $430.50. Failure to move above the $416, and our expectation of a corrective pattern unfolding with a lower target has gained significance.

The current move is a corrective A-B-C of the fourth wave in the making not an impulse fifth wave as expected earlier with an initial target between $385-387. RSI is still in the neutral zone indicating that it is neither overbought nor oversold. The averages in MACD, have once again gone below the zero line of the indicator indicating bearish ness.

Prices are lower than the short-term 9-day EMA at $403.75 and the medium term 25-day EMA is at $406.25. Look for prices to correct lower and test the support levels. Supports are at $394.75, 390 & 387. Resistances at $400, 403.75 & 416.50 respectively.

(The author is a trader with Scotiabank and the views expressed by him are his own and not necessarily that of his employer. This analysis is based on the historical prices movements and there is risk of loss in trading.)

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