The Hindu Business Line : Spot gold may test support level

SPOT gold prices fell sharply lower as the market digested heavy profit-taking, but retained the bullish investment outlook, which took prices to 25-year highs last week.

Gold prices are likely to resume their climb higher after this correction on supportive fundamentals. While we remain cautious towards a price correction in the short-term, new price highs in 2006 are expected. However, markets have an uncanny ability to go against collective expectations, as was the case early last year.

Spot gold prices resumed its decline breaking key support levels on its way. Though some support has come in at $490 levels, it is not convincing to call for a trend change. Stronger support is at $476-80 being the long-term trend line support point as seen in the chart above.

As long as prices stay below $507-08 levels, the probability of fall to $480 levels is bright. Extreme volatile moves are expected in the coming sessions as the international markets prepares itself for up coming Christmas holidays and it is ideal to stay on the sidelines and try buying only at the important support levels keeping the long-term trend in mind.

As per our recent wave counts, we believe the current move to be an explosive third wave move ending at $541 followed by the fourth wave correction in progress. RSI is in the neutral zone indicating that it is neither overbought nor oversold. The averages in MACD are still above the zero line of the indicator suggesting bullishness to be intact. Only a crossover of the averages below the zero line will signal bearishness again.

Prices are below the short-term 8-day EMA is at $503 indicating bearishness, while the medium-term 34-day EMA is at $496. Therefore, look for spot gold prices to test the support levels.

Supports are at $492, 485 and 478. Resistances are at $498, 501 and 508.

(The author is in the advisory panel of Multi Commodity Exchange of India Ltd (MCX). The views expressed in this column are his own and not that 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.)