Technical Analysis: Gold – Bullish trend is intact but correction expected
- 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.
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.
Figure 1: Gold monthly chart suggests that Gold is in a ranging mode with a zig-zag corrective wave action. *The Elliott wave count on STI is currently on the zig-zag corrective wave, which may be a potential wave 2 correction of the cycle wave phase
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.
Figure 2: Gold weekly chart still show an uptrend 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.
Figure 3: Gold daily chart shows a perfect prediction of gold movement. *The monthly bull flag can be viewed as a corrective descending channel. With momentum highlighted in five 3 sub waves movement. Similar to a corrective triangle momentum.
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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