The Hindu Business Line : Spot gold may head lower

GOLD prices recovered from recent lows after remarks by the Federal Reserve Chairman, Mr. Alan Greenspan, during his testimony to the house budget committee resulted in a dollar sell-off. He indicated that he saw little risk of the economy overheating as it recovered from a slowdown.

Dollar fell sharply after his comments and gold recovered from a four-week low on hopes that the central bank would maintain a measured, go-slow approach to raising interest rates. Long liquidation was seen in gold after the release of positive jobs data last Friday, which raised hopes of an interest rate hike in the forthcoming FOMC this month.

Gold rallied to a four-week high at $416.80 on Aug. 20 as the dollar struggled, oil soared and markets were nervous about Iraq and the risk of pre-election extremism during last week's Republican convention in New York City. Further US dollar weakness is expected to prompt additional short covering and fund buying in gold in the short term.

Gold prices moved sharply lower against our expectations. Though support at $395 held well, inability to cross $ 400-403 range would lead to a break of the rising trend line point at $397. One final push towards $406-407 cannot be ruled out before prices start moving lower.

Support should now be seen at $395 level, which is also the exponential 200 day moving average point. As we have been maintaining in spite of the recent strength in gold prices we continue to favour the downside in the medium term as the price structures suggest a sharp reversal once the resistance levels are tested.

We need to alter some of our wave counts internally; however, the bigger picture still remains unchanged. As per our recent count we are in a correction in the bigger picture after the fifth wave failed at $433 unable to cross the third wave top at $431.50 convincingly. A corrective wave "a" began from there and ended at $371. This was followed by a wave "b", which now looks to have topped out at $414.

A wave "c" has possibly begun from there targeting $365 levels. This will be confirmed after a break of $392. 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 suggesting bullishness. Only a crossover of the averages below the zero line in the indicator will signal a bearish reversal.

MACD is also showing a negative divergence where prices are making a higher high, which is not confirmed by a higher high in the indicator an important reason for our medium-term bearish call. Prices are below the short-term 9-day EMA at $402.80 and the medium term 25-day EMA is at $402.58. Therefore, look for prices to head lower.

Supports are at $398, 395 and 390. Resistances at $ 403, 405 & 408 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 of MCX. This analysis is based on the historical price movements and there is risk of loss in trading. He can be reached at gnanasekar_thiagarajan@yahoo.com.)

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