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Long Term Price Action Suggests Gold Decline Is Not Yet Over

Long Term Price Action Suggests Gold Decline Is Not Yet Over

Research, Research Team

Analysis of both the weekly and daily charts in the XAUUSD suggest that the price of gold may fall farther over the coming weeks and months. Here are the reasons why, and the levels to watch out for.

As investors enjoyed a bullish 2013 in the equities market, gold lost nearly 30% of its value, with the XAUUSD tumbling from 1,700 to June and December lows of below 2,000. A look at recent price action might offer some clues as to whether this trend is set to continue.

forex_gold_price_decline_not_over_body_Picture_2.png, Long Term Price Action Suggests Gold Decline Is Not Yet Over

First, take a look at the weekly chart above. A number of key technical indications are highlighted. The first is a Fibonacci retracement between 2008 lows and 2011 highs. From the top in 2011, price fell straight through the 38.2% retracement at 1,462 with minimal action. The 50% retracement offered slightly more support/resistance, with an April bounce stemming the decline temporarily, but once price broke this level, the decline resumed. At 1,180 at the 61.8% retracement, price found substantial support. The 61.8% Fibonacci retracement is often one of the most reactive Fibonacci levels, as it is a level large numbers of both retail and institutional traders watch.

In an upsideretracement, the 61.8% level can act as strong support as some traders enter short and others take profits.In a downside retracement, it can act as strong resistance as traders enter long and cover shorts. This latter concept likely caused the reversal in June, with price bouncing back up towards 1,400. At the end of last month, price once again touched the 61.8% retracement, which again acted as significant support. This time however, the reversal may not be quite as substantial.

The stochastic is an oscillating indicator that uses the opening and closing prices of an asset over time to gauge momentum. It is a bound oscillator, meaning it ranges between two levels that can help you determine when an asset might be overbought or oversold. A stochastic reading above 80 suggests an asset is overbought, and can indicate a potential downside reversal point. The XAUUSD has a stochastic reading of 89, indicating the bounce from the 61.8% retracement level might be coming to an end. Price action over the last two days has seen gold climb to 1,271, which has acted as support and resistance a number of times over the last six months. If this level holds once more, price could reverse back down towards 1,200. The lower highs indicate weakening momentum, suggesting the 61.8% might lose its significance if price reaches it a third time. If so, key levels will be the 1,100 flat psychological level and below that, support/resistance at 1,050-1,060.

forex_gold_price_decline_not_over_body_Picture_1.png, Long Term Price Action Suggests Gold Decline Is Not Yet Over

XAUUSD Daily Chart

Now take a look at the daily chart above. Price has trended downwards between a strong channel since late August 2013. After a bounce from the channel’s lower trendline at around 1,180 (coinciding with the aforementioned 61.8% retracement on the weekly chart), price has now reached the top of the channel, failed to close above it and reversed to the downside.

The commodity channel index indicator (CCI) measures current price in relation to the average price over a set historic period of time. As with the stochastic, the CCI can indicate levels at which price might be overbought or oversold. Because the CCI can stay overbought or oversold for extended periods of time, traders often wait until it crosses below the 100 or above the -100 levels to sell or buy respectively. Price crossed below the CCI 100 yesterday, coinciding with both channel resistance and the horizontal resistance highlighted on the weekly chart. This confluence of indications offers up a downside bias. As mentioned above, watch the 1,189-1,200 flat levels as potential targets in support of this bias.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.