After climbing above 1,400, Gold was good to climb further with 1,420 standing in its way. Unfortunately for bulls, price failed to break it, and was sent tumbling quickly back below 1,400 during the last trading day of May. As there wasn’t any strong economic news last Friday, it is interesting to see Gold prices tumbling strongly – there is a possibility that the sell-off may be due to profit-taking by the bulls or overreaction by the bears around 1,420 which is accentuated due to the lower liquidity on month-end. Therefore, it is important that we wait for further developments this week to fully affirm that price may be breaking below 1,400 for good.
A potential confirmation lays await during early Asian session. Price is currently testing the rising trendline once again, and is likely to meet the confluence between trendline and the 1,400 support/resistance in a few hours time. Should price manage to trade above the trendline firmly once more, the possibility for a move back towards 1,420 and potentially beyond increases, and suggest that the decline last Friday may just simply be an overreaction by the bears.
If 1,400/rising trendline confluence holds, then perhaps more credence should be given for a case of a bearish reversal. Nonetheless, 1,380 (and 1,375 preferred) should be cleared in order to break the short-term consolidation zone since 24th May which will provide a stronger indication that bears are back in charge.
From a longer-term perspective, the failure to break 1,424 before hitting 1,450 is disconcerting for bulls as it suggest that the underlying bears are strong – not a radical assertion considering that we are still under a broad bearish trend. However it is debatable whether current more towards the upside has ended, or just merely taking a breather.
Fundamentally, it is interesting to note that USD actually gaining strength last Friday despite stocks tumbling (S&P 500 -1.43%, DJIA -1.36%). The positive correlation between stocks and USD seems to have broken down and if this relationship holds for the rest of the month, the lifeline that Gold bulls were counting on (in the event of a stock tumble) is no longer there, and bears will be primed to continue testing 1,330 and potentially beyond. Again, as this new relationship between USD and US stocks was observed during the final trading day of May, traders need to be aware and ensure that this relationship is the new rule of thumb rather than the exception. With that in mind, and together with the technical ambiguity, it may be more prudent to continue observing price action for a little while more and let June’s narrative speak for itself.