Gold Holds onto Critical Ground

It is undeniable that gold prices have been dropping since the failure to take out $1300 per ounce. Nonetheless, gold succeeded in gaining roughly $85 in value as it traded from $1212 the previous month. A respectable rally came to an end and the question at that point was what percentage would be given back as gold pricing began to decline.

Key Fibonacci Retracement Levels

Typically, a shallow retracement will result in a net drawdown of either 23.6% or 38.2% retracement, key numbers of the Fibonacci ratio. A deep retracement will typically lead to a 61.8% reduction of the net gain during the rally.

In this rally, gold prices traded to an intraday high of $1298 on June 6th. From that point forward, gold prices have consistently traded to lower pricing for the last three weeks. Within the first week of this current correction, gold prices quickly broke below the 23.5% retracement at $1280 and challenged the 38.2% retracement at $1267, the low of that week. During the second week of this current correction, gold prices broke below the 38.2% retracement level closing just at the 50% retracement at $1256.70.

The lower pricing in gold for the first two weeks gave technical confirmation that this current correction would not be a typical shallow correction. With the 50% retracement taken out by week two, market technicians, including myself, saw the 61.8% retracement as a likely price point for this correction to subside.

It appeared that model would hold when, on Monday, gold exhibited a dramatic price drop, trading slightly below but closing just above of its 61.8% retracement. However, yesterday’s activity put even that model into question when gold opened below that retracement level and closed modestly lower on the day. Although a deep correction can result in as much is a 78% retracement of the prior rally, in a bullish model we typically do not look for a retracement of that magnitude.

The key to yesterday’s trading activity was the fact that the intraday low was critically close to the 200-day moving average, a key level that market technicians use to ascertain whether a financial market is in a long-term bullish or bearish stance.

That brings us to today’s activity, in which gold futures have firmed modestly and are currently trading at $1247.20 with a net gain of $3.70 on the day. More so, over the last two trading days, the intraday lows have held at roughly $1241, which demonstrates, at least on a short-term basis, some support for gold at this price point. Lastly, this modest gain moved gold prices back above the 61.8% retracement.

Whether or not gold prices will ultimately find support and begin to trade higher from this level is uncertain. What is certain is that this is how gold would act if it were forming a base, finding support, and then moving to higher ground.

Wishing you as always, good trading,