Gold prices have weakened for six consecutive weeks and made a 5-1/2-year low on Friday. Since falling to the $1,072.30 low, price has stabilized as market participants await whether or not the Fed will give us a clue whether or not they will raise rates in September. The two-day Federal Reserve meeting should give us a sign if the Fed is leaning towards pushing out the highly anticipated interest rate rise.
Price action on the gold daily chart shows that the recent downturn may have tentatively formed a bullish butterfly pattern. 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 expectations grow for the Fed to raise rates in December and not September, the bullish rebound may continue towards the $1,130-$1,150 area. It is around that area, we could see rangebound trading or the bearish trend may reassert itself. Further downward pressure could eventually target the $1,050 level, with deeper support coming from the psychological $1,000 handle.
Gold could be ready for strong rally as global demand has fallen to the lowest level since 2009. 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: Buy Gold at $1,090 with a stop loss at $1,070 and a take profit at $1,130. The Risk/Reward Ratio is 1: 2
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading