Wed Jan. 25—Comex February gold futures skyrocketed higher Wednesday, as the U.S. Federal Reserve reaffirmed that low rates are here to stay perhaps for years.
That interest rate inferential, of course, is bearish for the U.S. dollar, and weakness in the greenback, in turn supports the yellow metal.
CHART SIGNALS
The overall technical reading on the gold chart remains bullish, and metals traders will want to keep an especially close eye on dollar chart developments in the days ahead. The U.S. dollar index is setting up for a bearish reversal month (though that won't be confirmed until the last trading day in January).
MORE FUEL FOR GOLD BULLS AHEAD
If a bearish monthly reversal were to occur in the dollar, it could mark an end to the recent multi-month rally enjoyed by the dollar, which in turn would add more fuel to the gold bull fire.
Let's dive in and take a look at the technical situation on both the gold and dollar index chart.
ANATOMY OF A GOLD BULL
Taking a look at Figure 1 below, courtesy of Interactive Data, the gold market smartly rejected a test of major support at the $1,550/1,525 per ounce level in late December. The quick "V" bottom rally off that support zone to start the year confirmed the longer-term bull trend remains strong. The dip to that price level was seen as a sale on gold and buyers were eager to snap up the bargain deal.
In recent weeks, the February gold contract has also climbed back above its key 200-day moving average, considered to be a proxy for the longer-term trend. That level is shown in blue on the chart below and is currently about $1,642.
MOVING AVERAGE CROSSOVER
Additionally, a very simple moving average system generated a buy signal in early January, as the 10-day moving average crossed above the 20-day moving average. These moving average systems are known for catching the "bulk of major moves," while they often miss tops and bottoms. A look at the daily chart reveals that the recent signals on the 10-day/20-day system have caught very tradable moves.
WHATS NEXT FOR GOLD?
Wednesday's rally propelled the gold contract above the 61.8% Fibonacci retracement level of the November-December sell-off?
What does that mean? Traditionally, once a market takes out the 61.8% retracement of a move, it sets up a target at the starting point of the move—or in this case the $1,806 zone.
DOLLAR SELL-OFF WOULD HELP
What could speed along a rally to the $1,800 level in gold?
Be on the lookout for a monthly bearish close in the U.S. Dollar Index. The U.S. dollar index hit a new recent rally high in January, but has reversed and is trading in the lower end of the monthly range. A weaker close in January will confirm that bearish reversal and likely unleash a fresh dollar selling trend.
Get ready for a weaker dollar and stronger gold ahead.
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