Gold Prices Catch a Strong Bounce from Trendline Support

Risk appetite is fading and precious metals are catching a bid. Gold looks to be well supported although the medium-term outlook remains frail.

Gold Daily Chart

Gold Daily Chart

The week ahead is set to be a volatile one, and it seems the markets are seeing a glimpse of that already. Equity markets were under pressure in the early day while gold and silver are seeing a strong bid from support.

The benchmark German DAX index has declined roughly 1.5% ahead of the North American open as traders exercise caution ahead of several major events this week and square positions on risk assets.

Ongoing developments in the trade war between China and the US could be the biggest market mover this week. It continues to remain unclear if a deal will be reached ahead of December 15 and this should make equity bulls a bit nervous. But unlike the DAX, the S&P 500 is holding up and is on pace for only a slightly lower open.

Other risk events this week include the UK election, set to take place on Thursday, and the Federal Reserve monetary policy meeting. A rate announcement will be made on Wednesday.

Precious metals are seen bouncing from notable support areas. For gold prices, this support derives from a rising trendline that connects the mid-November low with the lowest daily close towards the end of the same month.

Gold Daily Chart
Gold Daily Chart

There is some upward momentum behind the rally, although it’s hard not to ignore the big bearish candle that printed on Friday as a result of the US jobs report. The bearish implication from the employment data beat stands to put a ceiling on any near-term rally in the yellow metal.

A horizontal level at $1472 appears to be significant. It marks the lowest daily close in October which happened to occur on the last day of the month. This level capped the rally attempt that took place around the middle of November.

Just above it, a stronger horizontal level comes into play around $1480. This level held gold prices lower ahead of the NFP report last week. In addition to the level, the 50 and 100-day moving averages are converging towards the price point to create a confluence. And if that wasn’t enough of a resistance confluence, there is also a trendline that originates from the August high.

With so much overhead resistance in play, it does not seem like the current recovery will turn into anything meaningful, despite the momentum seen in the early day.

The rally in metals appears to be broad-based as silver prices are recovering after recently printing a four-month low. Horizontal support at $16.56 triggered the bounce, although the upward momentum is lacking compared to gold.

Similar to the yellow metal, the upside looks limited for silver prices. Friday’s jobs report led to a downward break of a bearish flag pattern which signals more downside. It will likely take a push above $17.23 to shift the bearish sentiment in the markets. Ahead of that, resistance is seen from the lower bound of the previously broken flag pattern, currently just below the psychological $17 level.

Silver Daily Chart
Silver Daily Chart