Last night, gold prices had a violent selloff and made a new five-year low after China announced a much lower gold reserve count than expected. The initially drop then triggered a classic stop run at 9:25pm EST. The precious metal fell $50 to $1,080 in just 5 minutes and has now slowly stabilized back towards the $1,110 area. A substantial rebound for gold may be unlikely as a both a strong U.S. dollar and low inflation globally could persuade market investors away from buying bullion on this dip.
Price action on the gold daily chart shows that last night’s collapse formed a bullish Butterfly pattern with the $1,080 low. Point D was targeted by both the 127.2% Fibonacci expansion level of the X to A leg and the 161.8% Fibonacci expansion level of the B to C rally. If the bullish rebound continues, major resistance could come from the $1,130-$1,150 area. It is around that area, we could see the bearish trend reassert itself. Further downward pressure could eventually target the $1,050 level, with deeper support coming from the psychological $1,000 handle. Around these major lows, we could see extremely volatile price action and that could yield a major drop towards the $950 area before prices stabilize.
If we see price recapture the $1,150 area, a key tentative bottom could have been made and gold prices may target a major rebound towards the $1,190 area. Major resistance will come from the $1,195-$1,205 zone.
The trade: Sell Gold at $1,135 with a stop loss at $1,155 and a take profit at $1,095. The Risk/Reward Ratio is 1: 2
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading