Gnanasekar T.

SPOT gold prices rebounded sharply higher after the release of the US trade deficit data, which was viewed as bearish for the dollar. The US trade deficit narrowed in December to $56.4 billion, just a tad below market expectations for $57 billion.

Markets took support from news that the US lawmakers have objected to proposed sales or revaluation of gold stockpiled by the International Monetary Fund to finance debt relief for the world's poor nations. Markets digested the testimony from Mr Alan Greenspan, which did not have any impact on the dollar. Though the undertone for gold remains strong and the dollar is expected to provide further direction, one factor that could hold gold back is the possibility of European central bank gold sales.

Spot gold prices headed higher above the falling channel range as seen in the chart above. Support should now be seen at $421 followed by stronger support at $418. As long as $416 holds the downside, we can expect spot gold prices to test $430 being the horizontal trend line resistance level.

Spot gold rallied higher in line with our expectations, but did not dip below $410 as anticipated last week. Resumption of the bullish trend can be confirmed only after a daily close above $435. We would like to stick with our previous wave counts and only a move below $405 will force us to rework it.

As per our recent wave counts, the third wave ended at $433 followed by a fourth wave correction to $371 and the current move as a fifth wave as it shows characteristics of an impulse wave. Recent fall to $417 is possibly the corrective sub-wave of the fifth wave impulse we are currently in.

RSI is in the neutral zone now indicating an upward correction to take place. It is also showing a positive divergence, which was one of the reasons for a sharp pullback. The averages in MACD are below the zero line of the indicator suggesting overall bearishness. Only a crossover of the averages above the zero line in the indicator will signal a clear bullish reversal.

MACD too showed a positive divergence. Prices are above the short-term 9-day EMA at $421.58 and the medium term 25-day EMA is at $422.77. Therefore, look for prices to consolidate and rise higher towards the resistance levels. Supports are at $421, 418 and 416. Resistances at $425.75, 428 and 430.50 respectively.

(The author is associated with the Multi Commodity Exchange of India Ltd. The views expressed in this column are his own and not that of his employer. This analysis is based on the historical price movements and there is risk of loss in trading. He can be reached at gnanasekar_thiagarajan@yahoo.com.)

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