More Weakness Could Be in the Cards
Wednesday, May 3rd, 2006
By George Leong, B.Comm. for Profit Confidential
Gold prices continue to hold at close to $640 an ounce but there is also some congestion forming on the chart as the market decides whether prices should go higher in the near-term.
The basis June Gold futures contract on the COMEX broke to a new contract and 25-year high of $645.5 on Thursday before some profit selling due to a technically overbought condition on the chart.
My feeling is that despite the short-term and longer-term bullish sentiment surrounding gold, the metal may be somewhat overextended in the near-term so we could see more weakness before trying to stage another move to above the contract high. The breakout of the June Gold materialized after a sideways Rectangle formation at between $540 and $580.
The ability of gold to hold is helped by continued softness in the U.S. dollar, which is now at a seven-month low against the euro. A low U.S. dollar makes gold cheaper to buy for foreigners; thereby, increasing the demand for gold. But, given the recent strong U.S. economic data such as new home sales and durable goods orders, there will be some upward pressure on the dollar.
Gold is also attracting capital as a safe-haven holding. With tensions surrounding Iran’s nuclear program mounting, gold is attracting buying.
On the chart, June gold is facing some selling at $637 and a pivot point at $640. For gold to break higher, it needs to break above its contract high of $645.5, which will allow it to take a run at $649. Watch the trading over the next several days and monitor the lows on the day.
Breaks below $631 could signal the end of the near-term up-trend. Failure to break the contract high could also signal the end of the uptrend for now, but I expect gold will hold at $620 where there is decent technical support. A break below $620 would be negative and drive gold to the 20-day moving average at $611. The next few sessions will give us some indications.
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Tags: gold prices, U.S. dollar, U.S. economy
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
