Gold initially tried to rally during the trading session on Wednesday but gave back gains rather quickly as we are overextended by just about any measure you use. The Relative Strength Index is reaching the overbought condition, and of course we are testing a previous resistance barrier that was very difficult to overcome multiple times. Because of this, and the fact that we had gotten straight up in the air rather quickly tells me that a short-term pullback makes a certain amount of sense.
That being said, I’m not necessarily looking to short this market, but if we see the US dollar pick up a little bit of strength in an oversold condition, it will show itself in the gold market as well. The market certainly has a lot of bullish pressure underneath it, but I think given enough time we probably will have to work off some of this excess froth. If we were to break out from here, that would actually be somewhat dangerous considering the last couple of days have been straight up and vertical.
Underneath, the $2000 level is an area that I believe will offer a significant amount of support and a potential “floor in the market.” This of course assumes that we even get down there, which is not something that I think will be easy to make happen. However, the PCE Core Price Index coming out on Thursday could cause a lot of volatility in the markets as it is the Federal Reserve’s favorite indicator. It might be an excuse for people to take quite a bit of profit in this market, as gold has been explosive as of late.
Recently, we have been seeing some conflicting statements coming out of Federal Reserve governors, and that of course has the markets being choppier than ever. This is what the Federal Reserve does, it fumbles the ball time and time again. Quite frankly, the Federal Reserve will wait too long to loosen monetary policy, as they typically do. It’s almost impossible that we do not head into a recession, so it’ll be interesting to see how long it takes for them to change their attitude, but right now it looks like the simplest explanation to this chart is that we have come too far, too fast.
Being FXEmpire’s analyst since the early days of the website, Chris has over 20 years of experience across various markets and assets – currencies, indices, and commodities. He is a proprietary trader as well trading institutional accounts.