Comex gold ended sharply higher on Friday, its biggest two-week gain since 2008 on heightened recessionary fears and the continuing uncertainty over the euro-zone debt crisis. Weak US economic data caused gold to rise more than 12 per cent this month while other riskier assets slumped.
Markets are now looking for any sign of Federal Reserve action when bankers gather in Jackson Hole, Wyoming, late next week, one year after Chairman Mr Ben Bernanke launched a second phase of quantitative easing to revive the economy. More policy stimulus could be on the way, which could further accelerate bullion prices.
Comex gold futures moved higher in line with our expectations. As mentioned in the previous update, we expected a scenario where dips to $1,695-1,700 holds in the coming sessions, and then a subsequent rally towards $1,865-75 is possible.
This view materialised. Since prices are making a new high, it is difficult to identify a clear top or a possible target from where prices could turn lower technically.
However, extreme overbought conditions warn us of a strong correction at the close of this rally. Though prices have the potential to stretch itself towards psychological $1,900, we remain cautious on being on the long side from here. A subsequent correction lower could test supports near $1,585-1,620 in the coming sessions.
The wave counts have to be revisited again as a possible fifth could be in the making again. Potential targets for the fifth wave have already been met.
Chances exist for one last move towards $1,885-1,900 as an extension of the fifth wave. The corrective down move from $1,577 towards $1,478 seems to be a complex corrective pattern. Subsequently, the fifth wave is in progress now. RSI is still in the highly overbought zone both in the dailies and weeklies indicating a possible downside correction in the offing.
The averages in MACD are still above the zero line of the indicator hinting at bullishness to be intact. Only a cross-over below the zero line in the indicator again will signal the resumption of bearish trend.
Therefore, look for gold futures to test the resistance levels and then fall lower again.
Supports are at $1,817, $1728 and $1,625. Resistances are at $1,865, $1,900 and $1,920.
(The author is the Director of Commtrendz Research and also 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 firstname.lastname@example.org.)