Gold price actions showing signs of indecision in market

THE recent strength in the US dollar index has resulted in gold breaking below the key support level at US$1,300.

The psychological round number area was particularly important because it was the pivot point that kept the bulls intact since January 2018. For the past five months, there were five separate occasions where the number halted the sell-off (shown by yellow highlighted boxes in the chart).

It was only on May 15 that the bears finally broke below it. Once gold broke below the US$1,300 zone, the sell-off exacerbated as the long speculators were forced to cover their positions with their sell stops being triggered. On the day of the bearish breakout, gold fell to a low of US$1,289.

However, with the past few days of price action, there was an absence of the bearish follow-through. This suggests a possible false bearish breakout scenario. Usually, when price breaks below a significant range low, the trend shifts to the downside and the bearish momentum tends to sustain and accelerate. But we are currently seeing an opposite price action in gold.

Since May 16, gold has been consolidating within a US$12 range with most of the candlesticks being doji, signalling indecision in the market.

One of the more interesting price action happened on 21 May, when gold broke below a crucial uptrend line intraday. The uptrend line was established from the December 2016 low, making this a substantial support to watch.

After a major tug-of-war between the bulls and the bear, the bulls succeeded in defending the uptrend line and closed near the day's high. As a result, a bullish hammer was formed off the long-term uptrend line, suggesting a reversal higher next. The hammer's low of US$1,282 could very well be the next Higher Low point for this long-term uptrend.

On a longer-term perspective, gold tends to create false bearish breakout first before rising back into the general uptrend especially for this current uptrend that began in 2017.

For instance, the sell-off since August 2017 led price into a consolidation between the US$1,303 range high and US$1,S260 range low. Gold stayed range-bound for approximately nine weeks before a breakout.

As gold broke below the US$1,260 range low on Dec 7, 2017, the sell-off accelerated due to the many long speculators getting stopped out. But it took the market just three days to form the next bottom.

Note the bearish follow-through after the initial sell-off was weak, too. In total, gold fell as much as minus 1.9 per cent below the US$1,260 range low before the uptrend re-emerged.

Thus, the current price action mirrors the 2017 false bearish breakout scenario. The May 21, 2018, low of US$1,282 suggests a minus 1.7 per cent loss from the US$1,307 range low. A reversal back into the uptrend should be next in line.

In addition, the strong bullish breakout above the immediate US$1,296 range high and the bullish close above the US$1,300 psychological round number on May 24 further validates the bullish narrative. Expect gold to re-target the US$1,350-US$1,365 resistance area next, and a further break above the US$1,365 highs for the uptrend to establish a new Higher High point.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice