The Hindu Business Line : Spot gold to test resistance levels

GOLD prices headed higher on Wednesday after retails sales data came in surprisingly low below market expectations. June sales slid 1.1 per cent, well below expectations for an overall decline of 0.6 per cent.

The unexpected weakness is expected to have an effect on the second half economic growth. With US jobless claims, producer prices, and industrial production due Thursday, more dollar reaction is expected, and therefore a cautious tone is expected to prevail in both the gold and currency markets for the near term.

The dollar strengthened against the major currencies after the US Government said on Tuesday morning the nation's trade deficit narrowed to $45.95 billion from a revised $48.1 billion in May.

Markets were expecting a deficit of around $49 billion. A surprisingly strong data for the dollar on jobless claims and inflation data could ignite a short-covering rally in the dollar, which will be bearish for gold.

Gold prices continue to move in the rising channel. Channel resistance for gold is between $408-410. A daily close above $410 will be bullish for gold and has the potential to test the channel resistance at $413-415 levels. The 200-day exponential average is now at $392.40. This is also close to the rising channel support point at $391.

Only a break below $380 will see gold headed to its recent lows and possibly even lower to $365-368 levels. As per Elliot wave analysis, we have seen a failure of the fifth wave impulse at $433 and a sharp correction took place to $371, which is wave "A".

Wave "B" then started from $371 and shows signs of ending either at current levels or near the $413-415 levels. Wave "C" should now begin targeting lower levels, which is our preferred view. This view holds good as long as prices do not close above the $415 levels.

RSI is in the neutral zone now indicating that it is neither overbought nor oversold. The averages in MACD are still above the zero line of the indicator. A move below the zero line of the indicator will confirm a bearish reversal again. Prices are above the short-term 9-day EMA at $402 and the medium term 25-day EMA is at $398.

Therefore, look for prices to stay in this rising trading range and test the resistance levels before correcting lower. Supports are at $400.50, 398 and 392. Resistances at $ 406.50, 410 and 413 respectively.

(The author is associated with the Multi Commodity Exchange of India Ltd. (MCX). The views expressed in this column are his own and not that of his employer. This analysis is based on the historical price movements and there is risk of loss in trading.)

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