The Hindu Business Line : Gold may test support level

SPOT gold prices tumbled lower amid profit-taking and rebound in the dollar, a day after the Fed's interest rate hike and warning about rising inflation. Fall in gold was not directly tied to Tuesday's tightening, which was mostly expected, but by the comments made by the US Federal Reserve, which warned it may have to act more aggressively to counter inflationary pressures.

Federal Reserve raised a key US interest rate a quarter percentage point to 2.75 per cent on Tuesday, conceding inflation risks were growing but expressing confidence that gradual rate rises can contain prices. The strength in the dollar could be shortlived as long-term budgetary concerns are still in place and the geo-political tensions in the West Asia and North Korea persist.

Spot gold prices crashed lower against our expectations. A daily close below $433 negated our bullish expectations. This will be an important barrier for spot gold to cross in the near-term. And as long as $435 caps the upside, we can expect gold prices to slide lower towards $418, being the weekly channel support point as seen in the chart above.

Though we would not like to sound optimistic currently, looking at the bigger picture, we feel prices could reverse higher after testing the next important support at $418-420. We would like to stick to our previous wave-counts and only a move below $405 will force us to rework it.

As per our recent wave counts, the third wave ended at $433 followed by a fourth wave correction to $371 and the current move, as a fifth wave, since it shows characteristics of an impulse wave. 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 in the weeklies suggesting a bullishness to be intact. Only a crossover of the averages below the zero line in the indicator will signal bearishness again. Prices are above the short-term 9 and 34 day EMA at $433.80. Therefore, look for gold prices to test the support levels and rise higher subsequently.

Supports are at $ 425, 422 and 418. Resistances at $429.50, 432 and 435 respectively.

(The author is associated with the Multi Commodity Exchange of India Ltd. 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. He can be reached at gnanasekar_thiagarajan@yahoo.com.

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