Gold risks correction as Dow could rebound from 23.6% Fibo support

Gold performance so far in 2016

The yellow metal closed last year at $1061.25 levels, before the uptrend began and the prices rose to a high of $1263.37 this week. This means a 19% gain so far in 2016. The $200 rally is due to –

• CNY devaluation (currency debasement effect)

• Risk-off in equities (safe haven demand)

• Japan’s negative rate surprise (currency debasement + safe haven demand)

The move to negative rates has sparked fears among investors regarding the future course of action if the move to negative rates fails to prop up the economy. So far, the negative rates have not been able to prop up even the markets. Hence, the safe haven demand for the metal is likely to stay intact as investors face a serious question – where are central banks heading?

Dow performance so far in 2016

The Dow Jones Industrial Average (DJIA) finished last year at 17,602 levels, before the downtrend began and prices dropped to a low of 15,503 this week. This means the index is down almost 12%. The drop is being blamed to

• Oil price slide

• Banking sector concerns (in Europe)

• Turmoil in China

• Slowdown in US, Fed rate hike and central banker’s moving to uncharted territory (-ve rates)

Though the index is down 12%, it has only retraced 23.6% of the rally from 2009 low.

Dow Monthly Chart

• Chart clearly shows we are down to 15,547.29 (23.6% of 2009 low – 2015 high).

• We have been around this level in August 2015 and Jan 2016. On both the occasions, the index found takers around/below the 23.6% Fibo retracement level.

Dow Weekly Chart

• Chart shows head and shoulder formation with a neckline support at 15,100-15,000 levels.

• A break below the same on weekly charts would mark a major trend reversal.

Watch out for minor rebound

• Both charts coupled with oversold conditions on short-duration charts indicate the index could see a rebound in the following weeks from around 15,547.29 (23.6% of 2009 low – 2015 high).

• A recovery could see the index re-test 16,500 levels.

• However, a serious sell-off could be seen if the price take out head and shoulder neckline 15,100-15,000 levels.

Given the odds of a short-term rebound is high; the traditional overbought safe havens like Gold could witness correction next couple of weeks.

Gold weekly chart

Gold monthly chart

• Chart shows a bullish break from the falling channel and weekly 100-MA.

• Prices have also taken out falling trend line on the monthly chart for now, but it remains to be seen if we see monthly closing above falling trend line level of $1216.

• Moreover, the metal ran into offers at the monthly 100-MA seen at $1258, plus

• Metal also looks overbought on short duration charts

Hence, prices may correct to $1200-1190/Oz levels in next two weeks given the possibility of a short-term rebound in Dow index and overbought conditions and exhaustion on part of Gold bulls.

Gold’s February closing above 100-MA at $1258 could be a sign of major trend reversal, as the monthly RSI would confirm a bullish break above 50.00 as well