Gold broke through a very important support at 1280-1283 yesterday as we have been expecting. Yesterday’s breakdown of gold confirmed our bearish case for gold, and suggested that there would be more downside this week like we mentioned yesterday. We warned you about this move last Friday when we sent you our market analysis and talked about a head and shoulders pattern on the 1-hour chart (Chart 01). We said a breakdown under the neckline at 1288-1290 would take gold to first support at 1280-1283. We emphasized that a breakdown under 1280 would take gold to second support at 1267-1270. Now the first support has been broken, we believe gold is on its way to test the second support now. This second support is 100% Fibonnaci Extension of the last wave. We think that gold might find support there and retrace back up a little bit but the downside will not be over yet.
Gold fell to a 4-month low at 1273 yesterday and then recovered a bit on Asian session today to 1278-1279. Gold has not reached our second support at 1267-1270 so we expect the downtrend will resume. We think gold needs to test the second support before any meaningful retracement happens.
We would like to identify the area where you can add short positions if you would like to catch some intraday profit. In the above 1-hour chart (Chart 02), we identify two sell zones that gold may bounce up within today or tomorrow before resuming downtrend. The first sell zone is around 1280-1283 which was the major support before but now turns into a resistance. There is also a downward trend line that would act as a resistance around 1280-1282. If gold somehow manages to get through that resistance zone which we think very unlikely but cannot rule out a possibility, it will reach the second sell zone around 1286-1288.
If that second sell zone can’t hold gold back, we will have to re-evaluate the short term trend. Yet when looking at this current mini bounce-up, it looks like a mini bear flag pattern (the blue channel) which is a bearish sign. A breakdown of that blue channel will see gold quickly test the second support at 1267-1270.
The bearish sentiment for gold now is quite strong that it might never get a chance to get up to our sell zones but keep going down to 1270 or even lower. But if it does, you can think about adding some shorts and remember to set stop loss so you can protect your margin.