After trending downward through much of 2015, Gold staged a big breakout rally to start the year. Over the last two months, however, a head and shoulders top has been forming which suggests this recovery play may already be nearing an end.
Gold had a strong rally to start the year, driving up off out of a double bottom near $1.045 up toward $1,285. By the peak, however, a negative RSI divergence appeared suggesting that the rally was nearing exhaustion. Over the last month, gold has been retreating. Initially this looked like a normal trading correction but the spike up to $1,260 and subsequent retreat formed the right shoulder of a head and shoulders top, a bearish technical sign.
Gold currently finds itself trading between neckline support near $1,200 and shoulder resistance near $1.260. RSI trading near 50 suggests sideways momentum but it wouldn’t take much for a downturn to occur. The recent break of the 50-day average also suggests bears are regaining the upper hand.
Gold exploded upward to start the year based on three factors coming together:
Chinese stock markets crashed raising questions about the health of its economy
sending capital fleeing into defensive havens like gold and JPY.
A number of US corporations issued weak guidance for Q1 and 2016 adding to the flow of capital into defensive plays.
US rallying through 2015 had kept steady pressure on gold but this eased in early 2016 as the Fed cut back its planned interest rate hikes for 2016 to 2 from 4.
Over the last two months, however, some of these effects have faded. Last week, China reported economic figures for March which were in line or better than expected, easing fears about its economy and helping capital to flow back into risk markets.
This week and next, many major US corporations are scheduled to report earnings. These reports may give a better indication of whether gloomy US corporate predictions were on the mark or overly pessimistic.
A positive round of reports could send more capital back into stocks and keep the pressure on gold but another series of negative surprises could provide a new tailwind for gold. The big question now is whether gold could be heading for a deeper decline or move into a long-term sideways trend.
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