The yellow metal has witnessed a dramatic decline in the last 3 months – from multi-year peaks around 1365 to multi-year bottoms around 1211 – a plunge of more than 11% in quick time. Rising interest rates globally (in US and growing Asian countries too) as well as broad based dollar strength are commonly attributable factors.
A look at the charts tends to indicate that the decline has gone a bit too far. The downward moving trendlines (red colour lines) are aptly reflecting the collapse. Most of the momentum indicators are deep in the oversold territory. There are visible divergences in MACD Forest as well as the RSI. A closer look at the daily candles shows a Hammer# formed yesterday and a Doji* formed on the day before. Long lower shadows of yesterday and today indicates initiation of some buying interest. The region around 1200-1220 has acted as a strong support area on multiple occasions in the past – check the blue horizontal lines.
My sense is that Gold will hold its long-term support region in this rally. There will be a counter move towards 1260-1280 (to say the least). If the yellow metal breaks below 1190 and forms a fresh low, the above judgement will be annulled.
# Hammer – the candle has a long lower shadow and a short body at the upper end of the candlestick with a small or no upper shadow. The lower shadow must be more than two times the size of the body of the candle. It looks like a hammer. At an extended downtrend, a hammer gives a bullish reversal indication.
*Doji – a candle small in length (meaning a small trading range), with the opening price and closing price that are practically equal. A Doji reflects indecision and confusion. In a downtrend, a Doji indicates that sellers are losing confidence and buyers are showing interest – a bullish reversal signal.