With the price of gold having staged a modest recovery last week, the question everyone is asking is whether this is simply a reaction to the sharp sell off, or a genuine longer term reversal in the trend, and as always the starting point is with volume and the associated price action.
Whilst Monday’s wide spread down candle of last week shocked the markets, the price action on the daily chart was associated with an extremely high volume bar, confirming that this was indeed a genuine move lower, with the major operators also selling heavily. The following four days of price action saw gold claw its way higher to move back above the $1400 per ounce level, but the key point to note is that this price move has been accompanied by falling volumes. For those who study volume price analysis, a genuine move higher should be associated with rising volume.
Here we have a market moving higher on falling volume, and therefore sending us a clear signal that this is a weak move, lacking momentum and therefore unlikely to continue higher for much longer. In addition, and as I have said many times before, markets rarely turn and reverse higher overnight. Last week’s savage move lower was simply the first stage in accumulation, if this is indeed the start of this phase. What is now looking increasingly likely, is an extended period of consolidation at this level, with further moves lower to test the $1350 per ounce region in due course, and once all the selling has been absorbed by the big operators, then and only then will the price of gold be ready to rally and develop a longer term bullish trend.
For the time being, this simply looks like a short term reaction with bargain hunters buying the market, and in the next few weeks, expect to see gold move lower once again, either to build a consolidation phase between the $1325 to $1425 per ounce level, or if this lower area is breached, a further bearish sell off down below $1300 per ounce.
The areas of price support and resistance are clearly defined on the left hand side of the chart, with the volume at price indicator, and for any longer term recovery, the $1550 to $1600 per ounce region is the most significant, and will require a sustained move, with momentum to breach this area. One day of selling, no matter how strong the volume, will NOT be sufficient to breach this level, which is why we need to see momentum build from the downside with an extended period of congestion. When the big operators have absorbed all the selling pressure, then and only then will gold start to move higher in a bullish longer term trend.
By Anna Coulling