This week, we are turning to a long-term analysis of gold and look at why it may be about to crash toward the 1550 area. We already closed all our positions by last Friday as volatility has picked up and uncertainty has risen. 

Between the new Omicron variant hitting markets and the multiple risk events over the coming two weeks (Nonfarm payrolls due later today), we choose to continue sitting on the sidelines and watch how those events will impact the markets. One of those potential opportunities is in gold, which we are looking at in greater detail below.

 

 

Two weeks ago, we issued a short Gold trade that worked excellently, reaching our two targets and then even falling beyond them. We also said that the hawkish Fed and the strong dollar will likely be enough to push the gold price down from the recent highs and potentially start a new larger bearish leg in the period ahead (think weekly/monthly bear leg). It seems that things have now moved further in the direction of this bearish scenario, with one last obstacle standing in the way - the 1750 support area.

 

Notice that we are highlighting the 1750 area in particular, not 1700 as was the case in past months. As a matter of fact, gold even broke below 1700 a few times, only to rebound back higher. However, in the current context, the 1750 zone has become more significant, and therefore, we view it as the key threshold that can unleash a big sell-off in gold. 

 

As shown in the detailed chart below, 1750 is a big confluence support zone. However, the technical picture has deteriorated significantly in the past couple of weeks, suggesting that this downside breakout is almost imminent. 

• First, there was the strong rally above the 1850 zone, which now appears to have been confirmed as a fake one. As you may know, fake breakouts are ominous signs and usually mean that the reversal move is going to extend in the bearish direction.
• Second, the fake breakout and reversal resulted in a successful re-test (confirmation) of the broken uptrend trendline that goes back to the start of the big bull market in 2019. This trendline was broken this summer but was unconfirmed until last week’s decline. The last confirmation that the big bull trend from 2018-2019 is over would come when this 1750 support finally breaks.
• Third, gold has now moved below the 50 (blue) and 100 (orange) weekly moving averages. Also a bearish sign, even before this 1750 support has broken!

So, what’s the last thing that is still holding the market right now? 

 

It seems that the support line of the range going back to March could be it (dark magenta/maroon color). This support looks like the last thing standing in the way of further declines.

 

Indeed, once/if this 1750 support area breaks, there will be few things that can stop the price from falling to the next significant support area, which is around 1550. 

 

Note: we are not saying that 1700 is not important. It is still a critical support zone; however, in the present situation, it has lost significance to the 1750 zone, as the above chart shows. This means that if/once 1750 breaks, it’s likely that 1700 will soon break as well. 

 

So, this 1700 level where the prior lows are (and past major highs) could act as the final confirmation that a big sell-off is underway. In fact, I suspect that many long-term gold bulls, who accumulated large gold holdings over the past 12-24 months, have their stops below this 1700 level. If this is indeed the case, then once 1700 breaks, the selling could accelerate rapidly. Such a sell-off can easily and quickly take gold down to the 1600 price zone, from where the road to the 1550 zone noted on the chart would not be a very long one.

 

 

 

 

Best Regards,
Philip
Senior Forex Manager
FX Trading Revolution
w: www.fxtradingrevolution.com 

e: philip@fxtradingrevolution.com

 

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