Following a highly emotional trading week, markets have resumed this morning on a positive tone after the extended holiday in both the US and the UK. Last week’s market swoon was triggered by heavy falls in the Nikkei 225, precipitated by Ben Bernanke and soft Chinese data. However, in overnight trading the Nikkei regained some composure, closing up 1.2% at 14,311. 98, and at time of writing has continued to move higher on Globex. This positive sentiment has rippled through into the European markets and the UK.
So, in amongst this turmoil what of gold? Following the sharp fall of 15th April and the consequent recovery thereafter, many analysts assumed that this was the bottom for gold prices. This was not a view I held, and indeed in my post of 22nd April, I suggested this was simply a short squeeze. The reason for this was simply based on the volume profile on the daily chart, associated with this move higher, which to me was very clear and unambiguous, for two reasons.
First, this was certainly not a buying climax as such an event would never occur on just one or two candles. Second, gold prices duly rose on declining volume, a classic sign of price weakness, and certainly signalling a market that was not going very far. This duly occurred with gold running into strong resistance in the $1485 per ounce level, where we saw a period of price congestion, before breaking through the floor of this region at $1440 per ounce and moving lower once again to test the $1336 per ounce price point on 20th May.
This move lower was accompanied with rising volume, validating the bearish nature for gold prices during this phase. We have now entered a further period of price congestion which will ultimately dictate the short to medium direction for gold. This is clearly defined on the daily chart by the green and purple dotted lines. The green lines indicates the ceiling of current resistance, which is marginally below $1440 per ounce, whilst the floor of potential support is currently positioned at $1360 per ounce. This region is also very well delineated by the volume at price histogram to the left hand side of the chart, and it is this volume congestion area that will ultimately prove to be significant in the short term.
It is perhaps self evident that a break below the current support area at $1360 is likely to see further sustained weakness for gold, and any longer term recovery will need to breach both the $1400 and $1480 price points. However, I return to my previous point that at present there is no significant buying climax in place to warrant a strong recovery in the longer term.
By Anna Coulling