Gold Reaches a Key Reversal Zone

Key Points:

• Price action reaches a key inflection point and reversal zone.

• Watch for a failure to break through the current resistance zone.

• A downside move back towards $1278 an ounce is likely in the short term.

Gold has proved relatively triumphant over the past few weeks as the precious metal has continued to trade within the relatively safety of a rising channel. However, the metal’s price action is now reaching a key inflection point that has previously led to a reversal. Subsequently, the question remains as to whether Gold can retain its bullishness in the days ahead or whether I will succumb to the mounting downside pressures.

A cursory review of the chart clearly demonstrates the metal’s present conundrum with price action having entered a reversal zone around the $1294 an ounce mark. This resistance level represents the April high and is likely to be a critical level for the commodity as we move forward. A failure to push, and continue its rally, would potentially lead to a sharp decline lower as momentum stalls and the air exits the balloon rapidly. Lending further credence to the bearish scenario is the fact that the RSI Oscillator is also strongly overbought which suggests that a reversal, or a period of moderation, is the likely play.

Fundamentally, Gold has been the net beneficiary or a range of mixed economic data emanating from the U.S. of late with the relatively poor Personal Consumption Expenditure (PCE) from last week. The metric’s deflator is typically used by the Fed to measure domestic inflation and, subsequently, the disappointing result poured cold water on the markets near term rate hike sentiment. However, the result may prove to be transitory given that the latest round of JOLTS Job Openings figures showed some strong gains and will very likely please the U.S. Central Bank. Subsequently, Gold is likely to negatively react as we move closer to the Fed’s FOMC meeting and a potential rate hike from the central bank and this is likely to see a mean reversion in the near term.

Ultimately, the technical and fundamental factors are aligning to suggest that the precious metal could be facing a decline, or at least a period of moderation, over the short term. Subsequently, the most likely scenario is one where price action fails to breach resistance at $1295.47 and the bears flood in to push the metal back towards the $1278.00 an ounce mark. Once the pullback starts to occur the metal should slide fairly rapidly given the rising downside risks. However, keep a watch for any surprises from the U.S. Unemployment Claims and Wholesale Inventories figures, due out in the days ahead.