(Kitco News) - So far, so good, at least for the bulls.
Gold futures are holding a “line in the sand” at a major chart level that traders have been talking about for weeks now.
On Monday, December gold fell as far as $1,183.30 an ounce on the Comex division of the New York Mercantile Exchange. This brought the market near, but not below, the lows on a futures continuation chart of $1,181.40 on Dec. 31 and $1,179.40 back on June 28, 2013.
Since gold began sliding at the end of August, numerous traders have mentioned roughly $1,180 as a key chart point. Several analysts cited the metal’s ability to hold this so far as constructive for gold. But if the market were to reverse course and break through this after all, well -- look out below, they essentially said.
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| This weekly chart shows that gold has held around $1,180 three times since June 2013 |
This is an area where sell stops are likely building. These are preplaced orders activated when certain price points are hit, from traders either looking to exit losing trades, capture a profit or establish a fresh position.
“Obviously, it’s a line in the sand,” said Phil Flynn, senior market analyst with Price Futures Group.
And one that is holding, so far.
“The market is saying at that level, there is a point of diminishing returns on the charts,” Flynn said. “It (support) is going to be formidable. It shows you even with the dollar continuing its upward track, gold is finding some value at that area and it’s going to be difficult to go below that area.”
At least some support could be coming from the fact that there are still geopolitical risks in certain parts of the world, he added.
“There’s no certainty that that is going to continue to hold in the face of a strengthening dollar,” said Ralph Preston, principal with Heritage West Financial. “But for at least this time around, it looks like we got a bounce off of that level.
“Is it important? I think so. It’s more than a double bottom – it’s a triple bottom. It’s encouraging for people who have a long bias in the gold market.”
Still, he pointed out that the metal remains below the December contract’s 200-day moving average of $1,284.60.
A key for the market now will be if December futures can now get above last week’s high of $1,224, said Darin Newsom, senior analyst with DTN. “If it does, we may have a key bullish reversal in effect,” he said. He later added, “if nothing else, that could at least give us a short-term uptrend.”
The December contract was as high as $1,221.20 so far Wednesday, although it since fell back to roughly $1,210 around mid-morning.
Some of the bounce from Monday’s low was short covering, in which traders buy to exit positions in which they have previously sold, or gone short. But, Newsom said, there may be more at play since the current most-active contract of December has since been outgaining the next most-active month of February.
“There’s a push in the nearby versus the deferred, which is usually an indication there is some sort of need for actual physical gold at this point, or it’s just low enough that is attracting the buyers,” Newsom said. “As long as we continue see that, I would say it’s more than just a technical bounce or short-covering bounce. There’s also some new demand coming into the market.”
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But while gold is holding the roughly $1,180 area for now, it would be “significant” technically if this support should end up failing after all, Flynn said. This likely would mean sell stops and momentum-based selling.
“It would probably open up a test of $1,150 and maybe even $1,100 even,” he said. “It would be a brand new ballgame if we close below that area.”
Added Preston: “If it ($1,180) breaks, which isn’t out of the question, we could be at $1,000 in a blink of an eye. But right now, it looks like strong support.”
Technicians pointed out that the charts for the U.S. dollar will also be a key for gold, since the yellow metal often moves inversely to the greenback. The area around 88 in the U.S. dollar index could end up being a key chart-resistance level for gold-market participants as well, Preston added.
“It is strongly tied to the dollar,” Newsom said. “So if we believe gold is going up, there has to be some sort of reason or rational – possibly just some profit-taking or whatever you want to call it in the U.S. dollar index – to drive it lower for the next few weeks.”
By Allen Sykora of Kitco News; asykora@kitco.com
