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Gold Snaps Multi-Year Support, Pointing to Major Trend Change

By , Currency Strategist
29 December 2011 09:35 GMT

Talking Points

  • Crude Oil Appears Poised Higher as S&P 500 Futures Signal Risk Recovery
  • Gold Break Past 3-Year Trend Line Support Points to Major Trend Change

WTI Crude Oil (NY Close): $99.36 // -1.98 // -1.95%

Crude prices pulled back on broad-based risk aversion amid escalating Eurozone debt crisis stress yesterday. Looking ahead, broad sentiment trends remain in focus, with all eyes on another Italian debt auction. This time, the Eurozone’s largest debt-crisis victim (so far) will sell €8.5 billion in 2014-2022 bonds.

While the outcome of yesterday’s bill sale proved relatively positive, sovereign solvency fears still found their way to the forefront, casting a shadow over today’s outing. With that in mind, S&P 500 stock index futures are pointing cautiously higher, hinting the markets are positioning for a recovery in risk appetite. US Chicago PMI, the Kansas City Fed’s manufacturing activity gauge, and weekly Jobless Claims figures headline the economic calendar. Official DOE inventory numbers are also on tap.

On the technical front, prices put in a Bearish Engulfing candlestick pattern below resistance at 101.80, pointing to continued losses ahead. Initial support lines up at 99.19, a former resistance at the top of a falling channel set from mid-November. A break below this boundary exposes 97.89.

Gold_Snaps_Multi-Year_Support_Pointing_to_Major_Trend_Change_body_Picture_3.png, Gold Snaps Multi-Year Support, Pointing to Major Trend Change

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1555.43 // -37.80 // -2.37%

The outlook for gold prices continues to broadly favor the downside as Eurozone-borne risk aversion boosts the US Dollar – amounting to de-facto downward pressure on the yellow metal – while the slide in ETF holdings points to evaporating investment demand as the Fed’s apparent abandonment of QE removes the need for an alternative-asset inflation hedge. With that in mind, the greenback may find itself under pressure if Italy’s bond auction shows improvement along the lines witnessed with yesterday’s bill sale, sapping safe-haven flows and nudging gold higher over the short term. Needless to say, the reverse is likewise the case.

The technical picture appears very ominous however. Prices broke major long-term support at a rising trend line dating back to late October 2008, pointing to a major bearish reversal (although reading too much into current price action seems unwise given atypically low holiday-induced liquidity conditions across financial markets). From here the bears target the next layer of support at 1486.52. The trend line – now at 1568.46 – has been recast as near-term resistance.

Gold_Snaps_Multi-Year_Support_Pointing_to_Major_Trend_Change_body_Picture_4.png, Gold Snaps Multi-Year Support, Pointing to Major Trend Change

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $27.11 // -1.58 // -5.52%

Yesterday’s surge in US Dollar strength finally shook prices out of complacency and forced a break through the range bottom at 28.41, with silver now testing support at the bottom of a falling channel set from early November (presently at 26.81). As with gold and crude, the spotlight is on the outcome of Italy’s bond sale and its implications for the greenback over the near term. A bounce from here sees the 28.41 level recast as resistance. Alternatively, continued selling exposes the September 26 low at 26.05.

Gold_Snaps_Multi-Year_Support_Pointing_to_Major_Trend_Change_body_Picture_5.png, Gold Snaps Multi-Year Support, Pointing to Major Trend Change

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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29 December 2011 09:35 GMT