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Recent Rally in Gold: Significant Improvement or Just a Bigger Pullback?

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As the prospect of attacks on Syria receded, gold extended losses.

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When we take a closer look at the daily chart, we see a small inverse head-and-shoulders pattern underway (based on three August lows). As you can see on the above chart, the US currency has moved higher in the recent days and broke above the 82 level, which means that this bullish formation is confirmed.

Additionally, when we factor in the cyclical turning point (which we're seeing after a monthly decline), the outlook here looks very bullish. In fact, from this perspective, we see that the USD Index already started to move higher right at the turning point.

Now that we know the current situation in the US Dollar Index, let's take a look at the Euro Index.



On the above chart, we can see that the Euro Index attempted to move above the 200-week moving average in the previous week, but this attempt failed for the second time, and the breakout was invalidated.

Looking at the above chart, we can clearly see that the European currency dropped below the 61.8% Fibonacci retracement level based on the January - July decline. At this time, we can also see an invalidation of the breakout above the declining support/resistance line based on the January and June highs, which is also a bearish factor.

Let's take a look at the gold market.


Click to enlarge

On the long-term gold chart, we see that the yellow metal has climbed up once again and reached the previously-broken rising support/resistance line based on the July 2005 low and the October 2008 bottom (on an intraday basis). At this point, it's worth noting that this area is strengthened by the 38.2% Fibonacci retracement level based on the September 2012 - June 2013 decline. Although gold broke above this resistance zone at the beginning of the previous week, the breakout was invalidated in the recent days and the yellow metal dropped below $1,400 per ounce. On Tuesday, we saw another attempt to move above the resistance levels, but gold didn't even reach them.

From this perspective, the medium-term downtrend remains in place.

Now let's take a look at the medium-term picture to see more details.


Click to enlarge

On the above chart, we see that gold continued its rally in the previous week and reached the 61.8% Fibonacci retracement level based on the entire April-June decline. Although the price of gold managed to break above its June top, this breakout was quickly invalidated.

Additionally, when we factor in the Fibonacci price projections, we see that the recent rally from the August 7 low to the August top is similar to the upward move seen in July. If history repeats itself, we will see a downward move, which would be similar to the July - August decline.

From this point of view, it seems that the strong resistance range based on the June top and the 61.8% Fibonacci retracement level will keep the rally in check as it further strengthens the resistance created by the rising long-term line marked in red on the previous (long-term) chart.

Summing up, in recent days, the Euro Index has declined back below the declining red support line, which makes the outlook for the USD Index even more bullish. These circumstances will likely have bearish implications for the precious metals sector. With a bullish outlook in place for the dollar, it doesn't seem likely that gold will have enough strength to move above the previously mentioned resistance levels. Therefore, despite the recent show of strength, the medium-term outlook for gold remains bearish.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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