Gold Plunge- A Normal Correction or The End of the Glittery Shine for Now?

  • Apr 30, 2020 AEST
  • Team Kalkine
Gold Plunge- A Normal Correction or The End of the Glittery Shine for Now?

Bullion space is lined up to storm with some important economic data, and certain policies and the market seems to be patiently waiting for the Federal Reserve monetary policy and status of unemployment across the United States, which in the recent times ballooned to a record high.

While the market waits for the fundamental development across the bullion front, the gold and silver participants are closing watching this space. However, on the COVID-19 front we are seeing many countries either fully or partial lifting of lockdowns.

Despite all the noises around why the gold spot is retracing backwards, what we should be exactly concerned about is what could happen next and is it the time to rebalance your portfolio.

Let us try to find out by analysing the gold spot price behaviour in detail, and we would try to use technical analysis as our tool to address short- to the medium-term possibility of future movement.

"Technical analysis is a skill that improves with experience and study. Always be a student and keep learning." – John Murphy

So, let us begin

  • Gold on a monthly Chart

 

XAU Monthly Chart (Source: Refinitiv Thomson Reuters)

XAU Monthly Chart (Source: Refinitiv Thomson Reuters)

 

On the monthly chart, the gold spot is currently trading around its long-term resistance zone of ~ 1,800 per ounce and is trading above the positive cross of 50-day and 21-day exponential moving averages. The 12,26,9 period moving average convergence divergence or MACD indicator is giving a positive signal.

 However, on the monthly timeframe, the present monthly candle had crossed the high of the previous monthly spinning top candle pattern. Spinning top is considered to suggest indecisiveness amongst the market participants. The crossing of the spinning top high is a decent indication for the bulls.

 

XAU Monthly Chart (Source: Refinitiv Thomson Reuters)

XAU Monthly Chart (Source: Refinitiv Thomson Reuters)

 

On connecting the recent low to the recent high through the Fibonacci fan, it could be seen that the low of the previous candle is around the 1/3 fraction of the fan, which makes that fraction considerable support for the gold spot.

The volume pattern is showing tiredness amongst the bulls with the close-to-close volume flattening out while the prices are inching higher.

  • Gold on a Weekly Chart

 

XAU Weekly Chart (Source: Refinitiv Thomson Reuters)

XAU Weekly Chart (Source: Refinitiv Thomson Reuters)

 

On the weekly chart, the gold spot is currently trading above Span A or the mean value of the conversion line (dark blue) and the base line (sky blue), with a positive crossover between both of them. The short-term average (mean value of 9-week high and low) or the conversion line is now narrowing its gap with the long-term average (mean value of 26-week high and low) or the base line, reflecting a decline in momentum.

However, the spread between Span A and Span B- which is the mean value of 52-week high and low is yet large, suggesting that bulls are in strength.

The 14-week Relative Strength Index (or RSI) is showing bearish divergence with RSI not marking fresh highs, while the prices are.  

  • Gold on a Daily Chart

 

XAU Daily Chart (Source: Refinitiv Thomson Reuters)

XAU Daily Chart (Source: Refinitiv Thomson Reuters)

 

On the daily timeframe, the gold spot is showing a bearish setup with the prices on the verge of breakdown below from an ascending triangle pattern. Furthermore, the 14-day Relative Strength Index is making a bearish divergence, as seen on the weekly charts as well. The gold spot is currently hovering near the lower line of the ascending triangle, and the further price behaviour would depend upon the ability of bulls to take back the price first inside and later upwards in the triangle or upon the strength of bears to drag down the spot further, and confirm a breakdown.

However, the clear divergence of the price behaviour with the 14-period RSI suggests that bulls could face a strong challenge ahead.

 

 

XAU Daily Chart (Source: Refinitiv Thomson Reuters)

XAU Daily Chart(Source: Refinitiv Thomson Reuters)

 

On further analysing the daily chart, it could be seen that the gold spot is currently testing the conversion line (mean value of 9-day high and low), which should act as immediate support to the price. Also, the spread between Span A and Span B on the daily timeframe is quite large, reflecting a decent bull’s strength; however, a falling ATR, divergence in RSI, and falling momentum of close-to-close volume make the setup quite intriguing.

While the trend based indicator such as Ichimoku cloud is suggesting that the uptrend is in strength, the leading indicators such as RSI, MACD, VTC, ATR, are showing either divergence or slight variance from the price behaviour, which could be considered as early signs of a possible correction. However, seeing the current market status and the global setup, it would be interesting to see how the possible upcoming correction would pan-out, i.e., a normal correction in the upside rally or the end of the glittery shine in the safe haven.

 


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