Expect selling momentum in gold to fade away before rebound

AFTER months of trying to break above the US$1,360 resistance area, the bears emerged victorious in April and kickstarted the current leg of selling. Gold has been falling for the past four months and has erased around 10 per cent from the US$1,360 high in April. Nonetheless, we are expecting the selling momentum to fade away soon for the bulls to retake control.

On the price action front, the heavy selling since April has taken gold down to a key support area, between the US$1,215 and US$1,200 psychological round numbers. Keep in mind the support area is a pivotal point back in May 2016 and February 2017 as it succeeded in halting the selloff and subsequently lifted gold back into the uptrend with 14 per cent and 13 per cent rallies respectively. The current test of the US$1,215 support area shows a promising sign that the bulls are still present at this key support area. There were two days where prices tested the US$1,215 support area and the bulls relentlessly halted the selling pressure each time. As a result, price formed a hammer rejection bar off the US$1,215 support area on July 19 and 20, 2018, signalling a reversal higher.

Moreover, the Relative Strength Index (RSI) further substantiates for a reversal higher with the current oversold condition. The strong bearish momentum for the past four months has dragged the RSI into an oversold condition since June 20 with the RSI hitting an extreme low of 22 on June 28, suggesting for a mean reversion higher next. RSI measures momentum. A reading above 70 represents overbought condition while a reading below 30 represents oversold condition.