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Technical Trading: Gold Is Looking For Support

By Kira McCaffrey Brecht of Kitco News
Monday September 16, 2013 7:46 AM

(Kitco News) - December Comex gold futures trimmed overnight gains following surprise news that Larry Summers withdrew his candidacy to become the next U.S. Federal Reserve Chairman. Gold traders saw initial overnight support from the news as the number two candidate—Janet Yellen—is expected to maintain an easier policy stance longer than Summers.

"We are assuming based on her speeches that interest rates will remain lower for longer.  The Fed will shoot to lower the unemployment rate to the full employment level and this means the new target could be more 5.5% not 6.5%," wrote Chris Rupkey, managing director of Bank of Tokyo-Mitsubishi UFJ, in a research note.

"The FOMC thinks the timing of the first rate hike is September or October 2015, but under Yellen, based on her speeches, the Fed may delay this to the following year, in September 2016.  If you are a Fed watcher you may not have a lot to do over the next several years.  Short-term interest rates are going to remain at zero for longer than you ever would have imagined," Rupkey added.

Shifting over to the daily chart, December gold futures closed out last week with a solid loss. The December gold contract broke a rising bull trendline (seen in red on the daily chart below) and fell under its 20-day and 40-day moving averages, which likely turned some short- and medium-term trend-following traders bearish.

The market is looking for support and there are some good candidates to watch near term. Initial support lies at Friday's low at $1,304.60. If that breaks, however, the bears will be gunning for a test of the previous swing low—an important chart point—from the Aug. 7 low at $1,271.80, marked as Point A, on the chart below. That swing low also roughly coincides with a 61.8% Fibonacci retracement of the rally off the late June low, which adds strength to the support zone.

Looking at momentum, at the bottom of the chart, the nine-day relative strength index fell to "oversold" levels, under the 30% mark.  Markets can remain oversold for days or even weeks during strong trends, but it is a signal that gold has become vulnerable to a snap-back rally, which could emerge at any time. Looking left at the nine-day RSI in recent months, however, "good price lows" (those which presaged a several month consolidation period), formed while the RSI hit lows in the 12-15% region. That suggests the possibility of a little more downside near term before a stronger price low and support is found for gold.

Traders will be watching this week's outcome of the U.S. Federal Reserve meeting closely. No tapering would likely usher in a "relief" rally for the yellow metal. But, a small token tapering could also result in a "sell the rumor, buy the fact" type of rally move, especially with the expectation that an accommodative new Federal Reserve Governor in Janet Yellen, is waiting in the wings.

Kira Brecht is managing editor at TraderPlanet.

By Kira Brecht, contributing to Kitco News.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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