Gold holding make-or-break level

May 29, 2015 09:46 AM

Commodity bulls have had a rough couple of weeks across the board, with the broad CRB commodity index falling over 5% from the mid-May peak. The weakness has been widespread, with everything from industrial metals to agricultural commodities to crude oil all falling in tandem.

Though it’s also fallen with its commodity brothers, gold remains broadly rangebound around the $1,200 level. Last week, we highlighted the two fundamental drivers of gold and evaluated the odds of a breakout, and while the bearish impact of the strong dollar pushed the yellow metal sharply lower over the last few days, the two-month consolidation zone from $1,180 up to $1,225 continues to hold. From a price action perspective, gold is working on its second consecutive Doji* candle, showing indecision and a lack of an intraday trend. Meanwhile, the RSI indicator is testing its corresponding support level at 40, not yet raising any concerns of a imminent breakdown in price itself.

Given the persistence of the support level at $1,180, the market may see the current level in gold as a bargain opportunity to enter low risk buy trades, especially if the dollar pulls back after its big rally. In that case, gold could bounce back to the middle of its recent range at $1,200 or even the top up near $1,225. For most traders though, a confirmed break below the $1,180 would be a more exciting development; if we do finally see a breakdown, the measured move target would project a selloff down to the 6-month low at $1,140 or lower as we head into June.

*A Doji candle is formed when rates trade higher and lower within a given timeframe, but close in the middle of the range, near the open. Dojis suggest indecision in the market.

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.