Gold nearing pivotal support level

SINCE the breaking down of the US$1,980 support level in mid-May this year, gold has been fluctuating within a consolidation range and struggling to break above this prior support level that has now turned resistance. Gold prices, which are US dollar-denominated, have remained subdued due to a firmer US dollar. In fact, the US Dollar Index or DXY has recouped close to 3 per cent of its losses since mid-July. In addition, the recent surge in US Treasury yields, likely driven by traders seeking better yields from the latest sales of US$42 billion bonds by the US Treasury, has redirected fund flows away from the non-yielding bullion. This shift is influenced by the positive correlation between gold and treasuries, which are both considered safe haven assets.

Examining the technical chart on the daily timeframe, gold is nearing a pivotal support level at US$1,930 where the resulting price action could influence its trajectory for the remaining months of this year. This juncture would mark a retest of a persistent uptrend support line that has held throughout this year along with a backtest of the recent resistance breakout in July. Should there be a rebound from this point, it might signal a trend reversal from the downtrend that began when gold peaked in early May. The reversal might present itself in the form of a higher swing low formation potentially opening the door for gold to revisit the US$1,980 resistance level. Subsequently, it might form a bullish inverse heads and shoulders technical pattern potentially leading to a revisit of the year’s high level.

On the other hand, a breakdown of this key support would offer a bearish technical bias for the gold price to revisit the 38.2 per cent Fibonacci retracement mark near the US$1,900 level, confluent with the swing low pattern formed at end-June and the long-term 200-day moving average support.

With these two potential scenarios in mind, let us study the price action on the four-hour timeframe to find out how the near-term technical outlook is shaping up. us examine how the near-term technical outlook is shaping up. A bullish divergence signal is noticeable on the Moving Average Convergence Divergence (MACD) technical indicator where a higher low was formed despite the price trading lower near the US$1,930 support in the first week of August. Additionally, a bullish descending wedge technical pattern could also be forming up, with a potential breakout to monitor for near-term confirmation of an upside signal aligning with the bullish developments on the four-hour timeframe.

The writer is research analyst at Phillip Securities