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Gold in USD terms broke to new year-to-date lows on Thursday and printed its lowest level in almost three years. Given the metal is breaking down from a multi-month consolidation in a downtrend it would seem the market is set to embark on another impulsive move lower. Our analysis of the long-term cycles, however, suggests quite the opposite. A clear Pi cycle relationship with last year’s high indicates that the metal is prone to a reversal over the next few days that should lead to an important move higher in coming weeks.
Ancillary evidence seems to further support the case for a turn. Sentiment towards the metal is near historical negative extremes as evidenced by the Daily Sentiment Index (DSI) which is now below 10% bulls and a level that has spawned important turns in the past. Positioning data also reflects the behavior we would expect to see around an important low as several key Gold closed end funds we monitor are now trading at big discounts to NAV. An occurrence that was all but impossible just a few short months ago. This dovetails the panicky declines seen in paper backed US and European Gold ETF holdings over the past few weeks. Perhaps the most important variable favoring a reversal is the fact that the 1301 to 1284 area is a convergence of the 38% retracement of the whole 1999 to 2011 bull market and the 50% retracement of the 2008 to 2011 advance. Such a confluence of long-term support levels is rare and is a natural stopping point for the current decline.
GOLD Daily Chart: June 20, 2013
Charts Created using Marketscope – Prepared by Kristian Kerr
LEVELS TO WATCH
Resistance: 1321 (April low), 1330 (May low)
Support: 1284 (38% retracement of 1999 to 2011 advance), 1273 (Measured move)
STRATEGY – Buy XAU/USD after a daily close below 1301 then back above 1301
Entry: 1st daily close above 1301 after at least one daily close below it
Stop: Below the low of the low close day or 300 basis points
Target 1: 1400
Target 2: 1487
--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com
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To contact Kristian, e-mail email@example.com. Follow me on Twitter at@KKerrFX.