The American dollar gained ground against the precious metal during yesterday's session after the ISM Services Purchasing Managers' Index came out stronger than forecasts. According to the report released by the Institute for Supply Management yesterday, service industries in the U.S. expanded in October (55.4 vs. 54.4 the prior month). For almost a year, the biggest influence on the gold prices has been growing expectations that the Federal Reserve will begin to wind down its $85 billion a month in asset purchases sooner or later. Since the Federal Reserve ties future monetary policy to economic conditions, encouraging numbers will put tapering back on the table.
Looking at the charts from a purely technical point of view, I think the general outlook will remain bearish as long as the XAU/USD pair trades below the Ichimoku clouds. Basically, the overall trend is up when prices are above the cloud, down when prices are below the cloud and flat when they are in the cloud itself. So speaking strictly based on the charts, the path of least resistance for gold appears lower.
Today’s key levels to watch will be 1326 and 1306 as we sit in a relatively tight trading range ahead of important data releases. It is quite possible that the pair will continue its bearish tendencies if the 1306 support gives way. I think this level is critical because as we see on the daily chart the Kijun-sen line (twenty six-day moving average, green line) and 50% retracement level coincide at that level. If that is the case, the next support to pay attention will be the 1293 level. A close below the 1293 support level could accelerate downward movement. However, if the bulls take over and manage to shatter the 1326 resistance level which stopped their advance several times in October, then the next possible targets will be 1335.92 and 1345.
