(Kitco News) - Be nimble and alert. Gold has fallen within striking distance of a major bearish target.
Since the July price peak, the bears have been in control of the gold market. The market has been steadily trading lower in a downtrend pattern, with lower lows and lower highs. Strength has been limited and short-lived.
The bears are targeting a retest of major support from the December 31, 2013 low at the $1,185 level. There is little chart support ahead of that zone and it is a significant bearish objective.
The trend pattern is down, Comex Dec gold futures are trading below all significant moving averages, including the 20-day, 40-day, 100-day and 200-day, which is a bearish trend following signal. There is no sign of a base forming on the daily chart.
However, daily momentum studies, including slow stochastics and the relative strength index are at oversold levels. That is generally a signal that a market is vulnerable to a pause in the trend, or a counter-trend correction at any time. But, during strongly trending markets, momentum tools can remain oversold for days or even weeks.
Looking back at historical momentum signals, at the December 31 low, both momentum tools were showing a bullish divergence —a positive signal that presaged a strong rally move. That area is marked "A" on Figure 1 below. In early April, marked "B", one of the momentum tools was oversold and a modest rally ensued. In early June, both indicators were oversold and another modest rally move began, that is marked "C." Now, at the area marked "D" —both indicators are oversold. Slow stochastics could be showing a minor bullish divergence, but that has not been confirmed.
What does this all mean? The market has been sliding significantly in recent weeks, with little pause for correction or consolidation. Markets need to correct. It's like when you pull a rubber band too hard in one direction, eventually it snaps back.
As gold approaches a major bearish target and support zone at the $1,185 level, momentum tools are showing the market is vulnerable to a pause or a snap-back. The trend is bearish, but momentum indicators show gold is oversold. In very short-term action, a minor "hammer" bottom is developing on the daily candlestick chart on Monday, with support at $1,208.80. But, it has not been confirmed yet. The formation would need to stay intact through the final bell on Monday to confirm that pattern.
The hourly chart shows a bullish momentum divergence, which helps define the $1,208.80 zone as important short-term support. Initial resistance lies at $1,226.30 and then $1,229.20. But, remember if any near term strength were to emerge in gold prices, it would be counter-trend. Near term rallies will likely be used as a selling spot.
Bottom line?
Gold bears have come close to the December 31, 2013 low at $1,185 and they will force a test of that floor. It could be sooner, it could be later. But, be alert, be nimble, it is coming .
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By Kira Brecht, Kitco.com
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