Technical Trading: Gold Soars, But Be Careful: Don’t Chase

February 8, 2016

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(Kitco News) – It’s been off to the races this year in the gold market. Gold charged over 11 percent higher since the start of 2016, supported by a bevy of global market factors including reduced expectations for Federal Reserve rate hikes this year, uncertainty over global and U.S. growth prospects and increased appetite for safe haven investments.

Technically: the near-term trend outlook is solidly bullish. April Comex gold futures are soaring Monday morning and within striking distance of a test of major daily chart resistance at the Oct. 15 swing high at $1,191.90.

Gold momentum is running hot and investors and traders are chasing the rally.

What traders and investors need to know: Recent gains have taken on a parabolic type of move, which leaves gold vulnerable to a consolidation or correction at any time. Technical indicators, such as the widely watched 14-day relative strength index show momentum at “overbought” levels above the 70% line. During strong trends, it is true, that markets can remain at overbought or oversold levels for days or even weeks at a time. But, it is a signal that the current rally wave may be vulnerable to a pause.

April gold futures also soared outside the upper daily Bollinger Band line on Monday, another signal of an overstretched market.

Be bullish: There is no getting around it. Gold has formed a strong near-term bottom on the daily chart. The momentum traders are jumping on the best game in town in 2016 and gold is trending upward. Fundamentally, the bullish reasons for gold are stacking up and the early-year gains could be the start of a new significant rally move for gold.

However, in the short-term: use caution. Savvy traders may want to wait for a pause or a correction and an opportunity to “buy on a dip” and enter at better price levels. The uptrend in gold is good. But, the current levels may not offer the best risk/reward entry point.

Trading Tip: If a consolidation or correction unfolds it may offer a better spot to buy gold.

As gold rallies toward key resistance at the October high around $1,191/1,192 the market may succumb to some overbought and overstretched technical readings. If it blasts through that zone with a solid close above it, all bets are off and the gold market can continue to run. The trend does point higher. Just beware, the rubber band is getting stretched tight. And, all markets need to pause, correct and rest.

Key technical levels:

  • Bullish multi-day multi-week target for gold: $1,228, the May 2015 swing high seen on the monthly continuation chart for Comex gold.
  • Downside support on a consolidation or correction phase: $1,175 and then $1,164.50 (hourly chart support zones).

By Kira Brecht, contributing to Kitco News;
Follow her on Twitter @KiraBrecht

Category: Gold