(Kitco News) - Too often traders get caught up in the emotion of short-term trading moves. It is important to step back and analyze the big picture view to gauge market outlooks.
The bears have seized control of the near term outlook for Comex August gold futures. The yellow metal rallied steadily throughout June and an accelerated corrective sell-off has set in. But, it is always important to examine markets across multiple timeframes. Let’s start first with the daily chart and then expand out to the weekly continuation chart.
In the short-term, gold bulls have capitulated and a quick and heavy bout of profit-taking has set in. A bearish momentum divergence on the 14-day relative strength index reveals bullish fatigue and opens the door for a period of consolidation and correction.
For now, the August gold contract has retraced about 31.8% of the June rally move. Additional Fibonacci retracement supports are seen at the 50% level around $1,293 and then the 61.8% retracement near the $1,281 area. According to traditional Fibonacci theory, markets can retract up to 61.8% of a prior rally move without harming that uptrend. For now, the sell-off can be chalked up as a corrective pullback move. If however, more significant and substantial declines were seen, with a close under the $1,280 zone in the days ahead that would open the door for a retreat back to the June low at $1,240.20. For now, that is not that favored scenario.
Shifting out to the weekly continuation chart seen in Figure 2 below. Nearby Comex gold futures have been “coiling” or consolidating within a large type of wedge pattern for just over a year. The multi-month trend outlook is neutral within that very large range. The bottom of that large range comes in around the $1,183-$1,182 range (the lows from June 2013 and January 2014).
On the upside, that large neutral range sees upside resistance in the $1,428-$1,391.40 zone (the highs from August 2013 and March 2104).
For now, the market continues to coil within that range. If the consolidation pattern is to continue, a reversal high should be seen above support at Point A, the early June low at $1,240.50 (continuation contract pricing).
The key takeaway? Gold remains within its larger neutral range. Modest additional near term retreat is possible amid weakening momentum. But, if the gold markets “coiling” pattern continues, buying interest will emerge ahead of the June low. The Fibonacci retracement levels define a key near term “line in the sand” to monitor. Declines under the $1,280 zone would open the door to a retest of the June low.