Gold Technical Analysis: To Buy or Not to Buy

Mahmoud Abdallah

It appears that the price of gold is trading within a bearish channel formation, which indicates significant bearish short-term momentum in market sentiment.

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Gold futures posted their biggest weekly loss in more than a month as a death cross pattern emerged for the precious metal. Gold tried to move upwards at the end of last week's tradin, to reach the resistance level at $1791, but closed completely towards the support level at $1783. The strong bearish gains pushed prices towards the $1760 support level, the lowest since July 2020. During last week’s trading, gold fell by 2.5% during the shortened trading week. From the beginning of the year to date, gold has decreased by more than 6%. Gold is trading at a time of increasing optimism in the markets. This has led to a drop in the prices of safe haven investments as traders choose more exciting investments such as stocks. It appears that the launch of the vaccine is playing an important role in the market amid the coronavirus pandemic.

Silver, the sister commodity of gold, was up until the end of the week, as silver futures rose to $27.485. Silver will record a slight increase of 0.1%, taking its annual jump to 3.6%.

A bearish commodity pattern formed, also known as a death cross. This happens when the 50-day moving average falls below the 200-day moving average (DMA). Analysts are looking to the death cross to mark the line between long-term bullish trends and deflation.

Despite the modest appreciation of the US dollar this year, it is still down 9% from last year. On Friday, the US Dollar Index (DXY), which measures the greenback against a bundle of six major currencies, fell 0.27% to 90.35, from an opening at 90.57. The DXY is poised for a weekly decline of 0.15%, narrowing its 2021 gains to 0.46%. The weaker price is good for dollar-denominated goods because it makes them cheaper for foreign investors to purchase.

US Treasury Secretary Janet Yellen recently repeated her calls for stronger financial stimulus, telling CNBC, “We think it's very important to have a big stimulus package that addresses the pain it's caused - 15 million Americans are behind in their rent, 24 million adults and 12 million. A child does not have enough to eat, and small businesses are failing. So I think the price of doing little is much higher than the price of doing something big. We believe the benefits will far outweigh the costs in the long run."

This added to new inflation concerns, explaining the modest increase in gold prices on Friday.

Gold investors have also been reacting to the results of economic data to gauge the success of US economic recovery. The Manufacturing Purchasing Managers' Index (PMI) from IHS Markit fell to 58.5, the Service PMI rose to 58.9, and the Composite PMI rose to a reading of 58.8. Any reading above the 50 level indicates growth. Earlier in the same week, US retail sales numbers for January registered 6% growth, which was better than the 0.8% expected growth. January's general retail sales beat forecasts of 1.1% with 5.3% (month-on-month). The January PPI excluding food and energy exceeded the expected change (annualized) by 1.1% by 2%, while retail sales excluding cars exceeded expectations by 1% with a rate of 5.9% (month-on-month).
The initial and continuing jobless claims missed expectations. Housing starts also fell short of estimates, while building permits were hit by better-than-expected numbers. The Philadelphia Fed Manufacturing Survey and Markit Services PMI also beat expectations.

Relative to other metal commodity prices, copper futures rose to $4.0545 a pound. Platinum futures rose to $1294 an ounce. Palladium futures jumped to $2,357.00 an ounce.

Technical analysis of gold:

In the near term, and according to the performance on the hourly chart, it appears that the price of gold is trading within a bearish channel formation, which indicates significant bearish short-term momentum in market sentiment. Accordingly, the bulls will target bounce gains at resistance levels of around $1795 or higher at $1,807. The bears will look to pounce on a pullback at around the support levels of $1771 or below at $1760.

In the near term, and according to the performance on the daily chart, it appears that the price of gold is trading within a bearish channel formation. It has now declined to trade above the 50% Fibonacci level, away from all-time highs. The current pullback has pushed it to approach the oversold levels of the 14-day RSI. Accordingly, the bulls will target long-term retracements at around 38.20% and 23.60% Fibonacci at resistance levels of $1837 and $1924, respectively. The bears will look to extend the decline to 61.80% and 76.40% Fibonacci levels at the support levels of $1695 and $1609, respectively.

Gold chart

Mahmoud Abdallah
Mahmoud has been working fulltime in the Foreign Exchange markets for 12 years. Offers his analysis, articles and recommendations at the most renewed Arabic websites specialized in the global financial markets, and his experience gained a lot of interest among Arab traders. Works on providing technical analysis, market news, free signals and more with follow up for at least 12 hours a day, and aims to simplify forex trading and the concept of trading for his audience.

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