Gold to test resistance, slide

Comex gold futures ended higher on Friday due to short-covering and a weakening dollar. However, prices could come off again if the crisis in Europe worsens before year end. For the week, bullion lost almost 7per cent, its biggest fall since late September. It remains vulnerable to a deepening euro zone debt crisis and rising funding stress. Gold tends to perform well, when central banks print money or cut interest rates or when money managers diversify assets. The need for cash has overwhelmed gold's traditional status as a safe haven in the past few months, putting the metal on course for its first quarterly fall since end-September 2008 when the global credit crunch was at its worst.

Comex gold futures fell lower in line with our expectations. As mentioned in the previous update, technically, picture looks weak with prices failing to cross above $1,765-70 zone and then it could subsequently fall towards $1,600 levels. Oversold conditions warn of a pullback towards $1,625-35 levels in the coming sessions. However, subsequently prices could drop again back towards the $1,550 rising trendline support. Break below this could drag prices even lower towards $1,450 levels being a Fibonacci retracement point as seen in the chart. We initially favour a pullback towards $1,625-35 levels followed by a decline towards $1,550 in the coming week. Only a move above $1,718 could revive bullish hopes.

The wave counts have to be revisited again as a possible fifth has ended. Potential targets for the fifth wave have already been met. Prices have gone above $1,900 as an extension of the fifth wave. Fall below $1,600 confirmed that a corrective “A-B-C” has started. It is possible that Wave “A” ended at 1,535 and a wave “B” ended at $1,804. Fall below $1,675 could hint at a beginning of the wave “C” targeting $1,400 levels. Unexpected rise above $1,810 could force us to review our wave counts. RSI is still in the neutral zone now indicating that it is neither overbought nor oversold. The averages in MACD have gone below the zero line of the indicator hinting at a bearish reversal. Only, a cross-over above the zero line again could hint at resumption in bullish trend.

Therefore, look for gold futures to test the resistance initially and then fall lower again.

Supports are at $1,585, $1,550 and $1,500. Resistances are at $1,625, $1,645 and $1,685.

(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 >gnanasekar_thiagarajan@yahoo.com .)

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