Understanding the Hidden Strength in Gold’s Lateral Moves
While gold prices continue to trend sideways, the consolidation pattern hasn’t broken key support levels and the precious metal still shows every indication of moving higher in the near term, according to analysts at FX Empire.
“The gold market certainly looks strong at the moment, but I think we are entering a consolidation phase,” said Christopher Lewis, market analyst at FX Empire. “It does make a lot of sense that we do go sideways, as we had gotten far too overextended.”
Lewis noted that the relative strength index has been up around 70 over the last two days, but it’s beginning to pull back from this oversold level. “At this point in time, we have a couple of different potentials to work off some of the froth,” he said. “We either pull back and offer a little bit of value, or we spend some time working off the action itself.”
He added that while the $2,400 level will get a lot of attention, what he’s really looking for is “a couple of weeks of sideways action and then a breakout or some type of pullback, perhaps even as steep as to reach down toward the $2,200 level.”
“That would get a lot of the hot money out of the market and present a significant value opportunity,” he said.
Lewis sees many reasons for gold prices to continue rising, including central bank purchases and geopolitical conflict. “The United States issuing a trillion dollars’ worth of debt every 90 days or so certainly doesn’t hurt the case either,” he added. “I’m just looking for a better entry price.”
FX Empire’s Bruce Powers also drilled down into gold’s consolidation pattern, noting that the yellow metal has found support at $2,361 per ounce.
“That is just above the 8-Day MA at $2,359,” he said. “Another successful test of support at the 8-Day line keeps open the possibility of a continuation of the advance. The 8-Day line has done a good job of identifying support of the sharp rally. Therefore, a drop below the line is a sign of weakening that could lead to a deeper retracement.”
Powers pointed out that the consolidation over the last eight sessions “has occurred above support represented by the two top channel trendlines, whereas previously the lines represented potential resistance. If gold can stay above key near-term support of both the 8-Day line and trendlines, it has a chance of continuing to advance before a deeper pullback than what’s been seen so far.”
He cautioned that Friday’s sharp reversal after setting the new all-time high of $2,431 means longs have reason to tread carefully.
“It has characteristics of a key reversal day that may yet see follow through to the downside,” he said. “There is a possibility of hitting resistance prior to a new record high as trading is occurring within Friday’s range. Given the recent consolidation near the trend highs and difficulty in moving higher, there is always a risk of a sharp decline.”
Powers said that traders looking to enter new positions are hoping for a pullback, but “a breakout to new trend highs will indicate that a pullback may not be coming before the bull trend continues.”
“Those waiting on the sidelines will be forced to enter or continue to wait,” he said.
Spot gold last traded at $2,380.28 at the time of writing, up 0.81% on the session.
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