Gold Battered by Buck's Surge, but Short-term Support Sits at 1272

Despite seeing some hints of “risk-off” trade in other markets, traditional safe-haven gold has failed to catch a bid this week. In fact, the yellow metal has actually dropped to a 6-week low below $1290 in today’s early US session. The persistent strength in the U.S. dollar is undoubtedly one of the biggest factors driving gold lower; all things equal, if the value of the dollar rises, it will take fewer of them to buy an ounce of gold. Beyond the buck’s resurgence, gold is also pressured by weaker physical demand from Asia, a major consumer.

The technical picture for gold also favors the bears in the short-term. As noted above, gold dropped below key previous support in the $1290 area today, potentially paving the road for another leg lower. Meanwhile, the 4hr MACD is trending lower below its signal line and the “0” level, while the RSI continues to find resistance near the “60” level, indicative of an overall downtrend.

Though there are a plethora of near-term bearish signs, a developing technical pattern suggests we could bottom form off key support near $1272. Over the last two weeks, gold’s fluctuations have created the beginnings of a Fibonacci-based geometric pattern called a Bullish Butterfly pattern, but the name of the pattern is not particularly important. What is important is that there is a confluence of three support levels at $1272 (the 161.8% Fibonacci extension of XA, 161.8% Fibonacci extension of BC, and the ABCD pattern completion), increasing the probability of a bounce from that area. In addition, the 4hr RSI will also likely be in oversold territory if prices reach that potential floor by early next week, adding another bullish factor to the mix.

As a reminder, this pattern would only be activated if gold trades down to the $1272 level, and tomorrow’s NFP report will go a long way toward determining whether it will. That said, traders may want to watch for a bounce back toward $1300 if price starts to turn higher off $1272. Meanwhile, a break below $1272 would show that the bearish trend is incredibly strong and could expose $1280 (the 61.8% daily Fib retracement, not shown) or even $1240 (the 7-month low) in the coming weeks.

Source: FOREX.com