We’re heading into the final sessions of the week, and gold continues to hint at a bullish reversal. Admittedly, it also sits close to confirming its next leg lower, leaving a fine line between bullish and bearish scenarios around the 4,000 level—a key area the gold trading community is likely watching.
For a broader perspective, I recently published a couple of StoneX articles examining gold's seasonality in Q3 and market positioning. In a nutshell, seasonality tends to turn more supportive in July before strengthening further in August, delivering a higher historical win rate and stronger average returns.
With gold already down around 30% from its peak to the recent low, the potential for a technical recovery appears reasonable. That is especially true given how unpopular this view has proven on social media whenever I have raised it. As a contrarian, I see that as an encouraging signal rather than a reason for caution.
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Gold Futures (GC) Technical Analysis
The downtrend on the weekly chart hardly needs pointing out, given gold has fallen by nearly a third this year. Yet for the past four weeks, bears have repeatedly failed to push prices sustainably below 4,000. Weekly trading volumes have also been declining, which is not what we'd typically expect during a grizzly bear market. Meanwhile, the gradual reduction in long futures positions suggests the decline may be a longer-term correction rather than the start of a multi-year top.
A bullish hammer formed three weeks ago, and prices have yet to retest its low. Heading into the final sessions of the week, price action is also shaping a potential inverted hammer around the 4,000 level. Until we see a decisive break or daily close beneath the recent swing lows, I remain on guard for a meaningful bounce.
Crude Oil and the US Dollar Remain the Biggest Risks to Gold Bulls
The fly in the ointment is, of course, the stronger US dollar. However, if tensions in the Middle East begin to ease, it could pave the way for a pullback in the US dollar and provide gold with the catalyst for a rebound. That said, I still favour further gains in the US Dollar Index towards 102. If that scenario plays out, gold could first retest its recent swing lows before the anticipated bullish reversal unfolds
The October low around 3900, 100-week EMA (3776.4) and the September VPOC (3680.6) are the next major support levels should gold prices full break down. But if prices can hold above recent swing lows, resistance sits around 4200 and 4300.
Source: COMEX, ICE, TradingView
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Eyes on 4,000 as We Head into the Weekend
Sentiment is clearly against gold in the near term, after it fell more than 1% on Thursday for its worst daily performance in eight sessions. But the major support level around 4,000 is difficult to ignore. I suspect many traders will feel the same way, which could be compounded by portfolio managers looking to hedge with gold ahead of the weekend.
The risk of a gap higher in oil prices is genuine this weekend, which could of course weigh on sentiment on Monday. But if portfolio managers do use gold as a hedge, it may hold above recent lows to some degree—or at least attempt to.
From a purely technical perspective, dips towards 4,000 could prompt at least a minor rebound. However, for any bounce to have real legs, weaker crude oil prices and a softer US dollar are likely to be required.
Source: COMEX, TradingView
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-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
