Technical Analysis: Gold – Turning point in sight after rebounding off $1200 support July 18, 2017

  • The recent selloff in Gold since June 2017 FOMC meeting is ending
  • Near term target Gold: $1300 / Long term target Gold: $1920
  • Strong support off the $1200 psychological area kept the uptrend intact
  • Oversold Relative Strength Index(RSI) since 7 July 2017 is hinting a reversal over the horizon

After the most recent FOMC meeting in June 2017 the precious metals market got heavily hit as Gold and Silver fell to a low of $1205 and $14 respectively. The reason for the strong sell off in Gold and Silver was mainly due to the new hawkish language from the Fed as they explained how they would begin the balance sheet reduction by the end of 2017 if the economic data continues to improve.Nonetheless, our long term view on Gold remains bullish and the recent sell off have presented a good opportunity to hop back on to the long term uptrend.

Nonetheless, our long term view on Gold remains bullish and the recent sell off have presented a good opportunity to hop back on to the long term uptrend.

Strong support off the $1200 psychological round number 

The strong support off the confluence of $1200 psychological round number and 50% Fibonacci retracement level from both the December 2015 – July 2016 uptrend and December 2016 – April 2017 uptrend have managed to reverse the sell off shown by the tweezers bottom rejection on the week ended 14 July 2017.
on the week ended  14 July 2017.

Figure 1. Gold weekly chart – Tweezers bottom rejection off the $1200 support
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Source: Bloomberg

Oversold RSI signalling a bottom is in sight

More importantly, looking at the price action around the $1200 support area shows promising sign of a higher low bottom. As mentioned in the previous report “Buy the dips” on the relative performance of Gold when the Relative Strength Index(RSI) reaches oversold, Gold tends to rebound when the RSI reverts to the mean after overextending into the 30 oversold territory.

Following the RSI report, there were two more instances where the RSI signalled the bottoming process in December 2016 and May 2017.

Figure 2. Gold daily chart – Reversion of the oversold RSI points toward the resumption of the uptrend

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Source: Bloomberg

Gold effectively found a significant higher low point around December 2016 as the RSI recovered off the 22 oversold RSI on 15 December 2016. The confirmation of the bottom happened on 26 December 2017 after the RSI rebounded above the 30 RSI reading as price broke above the immediate downtrend line. Since then, Gold rallied sharply for 14% to a high of $1295 in April 2017.

The next bottom that was signaled by the oversold RSI occurred in May 2017 after the RSI hit a low of 28 on 9 May 2017. As the RSI recoiled off the oversold region on 11 May 2017, Gold leaped higher back into the uptrend and gained 6%.

The oversold RSI is flashing red once again with recent reading hitting a low of 30 on 7 July 2017. From the price action perspective, the support off the psychological $1200 area and 50% Fibonacci retracement level is showing a great deal of support as it readily rejected price. As a result, the hammer rejection off the $1200 psychological support area on 10 July 2017 could be the next higher low point within this uptrend.

Moreover, the RSI is also rebounding perfectly off the 30 oversold region since 7 July 2017 implies a reversal back into the uptrend where it currently stands at 47. Additionally, there was a subsequent bullish break above the downtrend line on 14 July 2017 suggests a shift in sentiment to the upside.

Hence from both the price action and RSI point of view, Gold seems ready to turn back into the uptrend from here. For the current up leg, expect Gold to retest the $1300 resistance area and for buyers to break higher to progress along the uptrend.

Refer to the following report “Shinning bright like a diamond” and “30% downside for the USD” for a detailed explanation of our bullish case on Gold.

Interesting price action showing up in Gold mining space as well

GDX, VanEck Vectors Gold Miners ETF is displaying a triple bottom formation off the $21.14 support area which is in line with the price action in Gold. The Bullish Engulfing Bar rejection off the $21.14 support area on 10 July 2017 was the price action that confirmed the triple bottom formation, and if we expect Gold to take off from here, then the GDX will follow suit with this triple bottom formation to retest the $23.86 resistance area followed by $25.71.

Figure 3. GDX daily chart – Triple bottom formation

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Source: Bloomberg

 

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About the author

Profile photo of Jeremy Ng

Jeremy Ng
Research Analyst
Phillip Securities Research Pte Ltd

Jeremy specialises in Technical Analysis and has 10 years of experience in studying price action. His areas of expertise include intermarket analysis on the equities, currencies, commodities and bonds market.

He is also a regular columnist on The Business Times - every Monday ChartPoint column.

He graduated with a Bachelor of Science in Banking and Finance from University of London.

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