Gold prices dropped on Thursday and Friday after price respected a bullish butterfly pattern that signaled a rally from the $1,072.30 low to $1,126.30. The retracement may just be some profit taking and thin conditions. The precious metal fell to a 5-1/2-year low on July 24th and hedge fund and money managers appear to be abandoning short positions according to the Commitment of Traders report. The report highlighted positions as of last Tuesday. The short trade still appears overcrowded and we could still see another major leg higher.
Price action on the gold daily chart shows point D of the bullish butterfly pattern was targeted by the $1,072.30 low, which is both the 127.2% Fibonacci expansion level of the X to A leg and the 161.8% Fibonacci expansion level of the B to C rally. As expectations for a September rate hike by the Federal Reserve fade, we could see gold prices climb higher in the near future if we see a drop with inflation data. Some surveys show expectations for a September hike falling to 40% from 50%.
If we do see a return of the longer bearish trend and price breaks below the key $1,072 level, immediate downward pressure could target the $1,050 level, with deeper support coming from the psychological $1,000 handle.
Major resistance still remains at the $1,195-$1,205 zone. If you are still long from the prior post, you may want to bring your stop to $1,105 (this may secure a $15 gain).
The trade: Buy Gold at $1,110 with a stop loss at $1,095 and a take profit at $1,140. The Risk/Reward Ratio is 1: 2
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading