Gold Vulnerable To Near Term Backing And Filling

New York (Oct 13)  Comex Decmeber gold futures are moderately firmer heading into the New York open on Monday, but well off their overnight highs. For now the bulls are pausing ahead of 40-day moving average resistance, but the action is not really a surprise. Gold bulls marked out an important bottom last week, as the market rallied sharply from key support. And it is now vulnerable to a short period of consolidation or "backing and filling" as the market digests last week's gains.

Last week's action was impressive and marked out a near term bottom on the daily gold chart for gold. The gold market fell to test major long-term support around the $1,182 per ounce level (the June 2013 low and the January 2014 low).

The quick sell-off on October 6 to an intraday low at $1,183.30 was quickly used as a buying opportunity. Long-term physical buyers were attracted to that level.  A bullish reversal day formed on the daily chart, which cements the $1,183.30 as strong near term support. The weekly chart for December gold reveals a bullish outside week last week, which is another positive signal.

The bulls drove the gold market higher last week through initial 20-day moving average resistance, which is a positive signal. That moving average seen in red below in Figure 1 is now support at $1,218.30 an ounce.

However, above the market the 40-day moving average, seen in green in Figure 1, stands as important near term resistance at $1,244 per ounce. December gold has been trading below its 40-day moving average since mid August.

Moving averages are trend following indicators and the recent push above the shorter 10-day and 20-day points are positive for the short-term trend for gold. But, in order to show improvement to the intermediate term trend, gold would need to conquer the 40-day moving average, which could be a tough hurdle.

Daily momentum studies are now bullish. The 14-day relative strength index, shown below the gold prices reveals a "bullish divergence." When December gold touched the fresh 2014 low on October 6, the RSI had already turned higher. The indicator has pushed above the 30% zone (the oversold line) and is now pointing higher. The bullish turn from oversold levels gives the bulls the edge on a daily basis going forward.

Very short-term, however, hourly momentum studies are falling from overbought levels, which could allow for modest backing and filling and minor retreat. There is strong hourly chart support at the $1,217.60 level for gold. The 20-day moving average is also important near term support. As long as those levels holds firm, any near term retreat should be minor.

Source: KitcoNews