Chapter 49 08/21 XAUUSD: Corrective Rebound Unlikely to Extend Far, Focus on Shorting at Highs
Summary: Gold prices exhibited steady strength on Monday, characterized by short-covering and corrective rebounds. A weaker U.S. dollar (USD) acted as an external bullish factor for the gold market. However, the continuous rise in U.S. bond yields, which remains bullish, is limiting the upside potential for gold prices.
Fundamentals
On Monday, U.S. bond yields were on the rise, particularly for long-term bonds. For instance, the yield on 10-year bonds is 4.32% today, up from 3.88% a month ago and 3.02% a year ago. Meanwhile, the yield on U.S. 10-year Treasury Inflation-Protected Securities (TIPS) has exceeded 2%, marking its highest level since 2009. With ongoing inflation, yields may continue to climb.
The upward movement in U.S. government bond yields is attracting investors who are diversifying their portfolios by moving funds away from the gold and stock markets, which is bearish for gold prices.
As per MarketWatch, August might be the worst month for the S&P 500 index in 2023 due to the rise in bond yields.
According to Bloomberg, as of last weekend, the assets under management in exchange-traded funds (ETFs) investing in gold came close to 2,800 tons, marking the lowest level since March 30, 2020.
With investors turning their attention to the Jackson Hole Economic Symposium that is set to begin on Thursday, gold prices seem to have found short-term support after the downward momentum appeared to have exhausted. If Fed Chairman Powell's speech at the symposium leans toward a resolute hawkish tone, signaling bets on higher U.S. interest rates for an extended period, gold prices might dip toward $1,860. However, if Powell conveys a more cautious and dovish stance, this could potentially propel gold prices back above the 200-day moving average, touching $1,920.
Technical Analysis
Gold prices experienced a strong correction after touching the range peak near $1,987 in recent times. A channel-like downtrend structure has formed in its 1-hour chart, and last week, the price dropped below the previous low of $1,892, entering bearish territory. Additionally, in today's trading, while bulls seem to have found some support, they haven't yet reversed the downward trend, indicating both bulls and bears remain cautious.
Momentum indicators suggest that the recent downtrend might be overstretched, which is also indicative of the pause in the decline. Specifically, the Relative Strength Index (RSI) is oscillating around the 30 oversold level, and the stochastic oscillator has been lingering within the oversold region over the past two weeks.
If prices manage to rebound within this range, bulls might first test the psychological level of $1,900, followed by the important resistance at $1,932, which aligns with the 50-day SMA. Should it surpass the latter, gold prices might challenge the February high at $1,959.
On the other hand, if the correction continues to expand, the March resistance level at $1,857 could become the first line of defense, potentially turning from resistance to support. A breakthrough of this range could open the door to the 2023 low at $1,804.
Overall, gold prices have been undergoing a downward correction, and despite reaching oversold conditions, they have yet to see the anticipated rebound before breaking the previous low. Looking ahead, downward pressure is expected to persist and intensify until the exit from the current downtrend structure. In terms of trading strategy, focusing on going short at highs is recommended.
Trading Recommendations
Trading Direction: Short
Entry Price: 1893
Target Price: 1960
Stop Loss: 1910
Valid Until: 2023-09-04 23:55:00
Support: 1887, 1860, 1857
Resistance: 1888, 1892, 1900
