Technical Analysis: Gold – Bullish trend is intact but correction expected December 16, 2019 515

  • Gold had a strong move to the upside in May 2019 when it broke the 3-year resistance at 1377.41
  • Gold had briefly crossed above the 1500 psychological level for a period of 3 months.
  • Since the rally in May 2019, the precious metal has been floating above the 1450 level, signifying its strength.

 

2019 has been a great year for Gold. The precious metal has been on a strong bullish trend in 2019 after a prolonged ranging period from Q4 2015 to Q2 2019. Tracing back the gold movement, the recovery of Gold started in Q1 2016 when prices open at 1061.05 and steadily climbed to 1377.41. Gold had a bear run from September 2011 to 2016 and there are calls that predict Gold may hit below 1000. This is uncalled for as the cost price to manufacture gold is at 1000. Price swiftly reversed above 1046.33 in end December 2015, starting the bull run from 2017 to 2019.

Going forward, Gold surged in 2019 due to the rate cut from the Federal reserves and the gloomy economic outlook. The market heaved a sigh of relief when US and China reached a “phase 1” deal in principle, marking a pause to the trade war that has lasted one and a half years. This resulted in a delay in the December tariff hike.

 

US GDP expected growth and NFP shows signs of employment rate increase

The US GDP results rose 1.9% in third quarter, beating analysts’ estimates. Analysts believe that the GDP outlook will continue to look bright. Non-farm payroll last month shows a significant increase in jobs by 266,000, beating estimates of 187,000. Which caused the unemployment rate to fall to 3.5%, 0.5% below the natural rate of unemployment in the United States. With a positive economic outlook, the rise of gold prices may stall as yields increase.

 

The monthly wave count is forming into a potential zig-zag corrective wave with prices forming a B wave. Based on the monthly chart above, the 5-sub wave count of wave ((A)) has been completed from Q3 2011 – Q4 2015. ((B)) wave has yet to be completed. But some may argue that the ((B)) wave has completed when prices reject the psychological price level of 1550. However, prices still fell short from the minimum 61.8% retracement level of wave ((A)) at 1585.51. In other words, there may be still potential upside towards 1585-1560 level.

Another classic technical pattern is the bullish flag formation, which is a highly probable bullish continuation pattern. In summary, the analysis of the monthly chart gave a clue that gold may have a high possibility of a long-term bull run, possibly beyond 1800.

 

 

The weekly chart shows a clear uptrend with price trending strongly above both 50 and 200 SMA. However, the recent periods circled shows a cluster of pin bars and dojis. These usually signify that buying momentum is weakening and price may head into a correction towards the weekly major support zone. If we were to analyse the monthly bullish flag, Gold has yet to complete the 2-point base touch, hence a bullish breakout is unlikely in the short term. 

 

Gold’s daily chart shows a perfect price action movement. The monthly bullish flag pattern is much clearer on the daily chart. Based on the daily chart, there is a sub corrective bearish channel in the ii leg of the C wave. As such we believe that the bearish fall is imminent and prices may decline towards the potential buying zone 1 at 1401.83-1419.37, which is confluent with the 88.6% of the Fibonacci retracement level.  

However, the 1401.83 region may not be the best buying zone. Firstly,  there may be a movement through to wave D unless 1450 resistance level is broken. Secondly, the corrective channel is a 5-wave structure movement. It is highly unlikely that there will be a strong bull run at buying zone 1 before wave E is formed. Thirdly, prices closed at the resistance level of 1483.37 on 9th and 12th December respectively and there may be a potential double top formation.

In summary, we may see a drop in gold prices in 1H 2020 before a greater rally in 2H 2020.

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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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