Technical Analysis: Dollar Index and Gold- Gold to enjoy a bullish outlook in the longer term unlike the Dollar January 13, 2020 121

  • Gold had a strong move at the start of 2020 but last week’s closing dampens the bullish sentiment.
  • Dollar index took the market by surprise when it rallied on the first trading day of 2020. Breaking 97.00 psychological resistance on the next following week.
  • Inverse relationship of both Gold and the Dollar index will remain with Gold outperforming the Dollar

 

2019 has been a great year for Gold. The precious metal had a bullish rally in 2019 after a flat performance from 4Q15 to 3Q19. Gold was in a downtrend from September 2011 to 4Q15. There were predictions for Gold to hit below 1000. However, prices were well supported at 1046.33. Gold began to recover from 4Q15 when prices opened at 1061.05 and eventually broke out of its range at 1377.41 in 3Q19. It has rallied since to 1611.50.

On the other hand, the dollar index has been performing poorly from Q32019 when the index peaked at 99.60, 0.40 points short to reach the 100.00 target level. This signifies that the dollar is actually overheated and with the 3 rates cut in 2019, the dollar was looking for a sell down.

 

The weekly wave count, in a nutshell, has completed almost 80% of the total double three corrective waves with the ((b)) wave on its way to completion. The index indicates that the dollar index will have a up move to complete the ((b)) wave despite a breakdown of the rising wedge formation as classic technical price action suggest that the morning star formation may be the key to an upward reversal. However, the rally is limited and will reverse to a downward 5 sub-wave move of the ((c)) wave leg. There are currently two targets for the ((b)) wave. 100.14 and 101.54 which lies on the 75.4% and 85.4% of the Fibonacci retracement level of wave X. 

 

The daily chart shows a clearer move of the upside rally in which there are two reversal patterns highlighted. First, the greater falling wedge from Oct 2019 to Jan 2020 has yet to be broken but the smaller falling wedge formation indicates a sign of a false breakout. The first price forms a shooting star on Friday close below the resistance zone. Second, the bullish momentum for the past 4 periods is shrinking with the 2nd period candle broking past 97.00. However, the third candle highlighted a slowing momentum near the resistance zone.

 

As such, there might be a further downside before a rally occurs. The ideal rebound price will be at 96.92 regions.

 

Gold’s weekly chart saw a good start to 2020 when it bashed through the corrective wedge top and reach the target of 1611.50. However, gold had a weak finish in the 2nd half of the week and closed off the week with a shooting star. Also, prices returned to near the support area at 1557.31, which may cause the prices of gold to drop below the support level, turning the support into resistance. On the indicator front, the bearish divergence signifies that there will be more potential downside of gold. As such, we may see gold ranging between 1464.56 to 1557.31 in the next few months.

 

Despite a weaker than expected Non-farm payroll result, the bullish move on Friday for Gold, it did not break the Thursday high at 1563.50. This signifies that Gold is considered overbought and may correct further into the key rebound area for a few months. As such, Gold prices may enter into a ranging phase with an ideal and possible strong rally at 1466.90, which confluence with the 88.6% of the deep retracement of 1488.26-1611.79.

There is a strong possibility that Gold may have a continued strong rally like what was mentioned on the weekly chart. However, several conditions need to be met. The first condition is that prices must break the 1580 psychological level within a week. Secondly, the price must stay above 1580 for at least 2 daily periods within a week.

 

Summary

The dollar index is pointing towards a short-term rally while Gold is showing signs of a bearish correction. No doubt gold will hit the long-term target of 1800.00 in time to come, the technical sentiment presented may find Gold in a corrective phase while the dollar is soaring in the near-term.  With the dollar strengthening in the 2nd half of January 2020, there is no doubt that gold may be heading into a corrective ranging phase with a possible regular flat in the making.

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Profile photo of Chua Wei Ren

Chua Wei Ren
Technical Analyst
Phillip Securities Research Pte Ltd

Wei Ren specialises in Technical Analysis and has 9 years of experience in studying classic technical price action. He also study and research extensively on Elliott wave theory, Dow Theory and Supply & Demand strategies as he believes that history plays an important role in how the market is reflected in the future.

He graduated with a Bachelor of Economics and Finance from University of Murdoch.

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