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Gnanasekar T.

GOLD prices retreated on an extended correction with major volatility noticed in the currencies, which led to some selling pressure and much needed correction for gold.

A record 1,581,320 gold futures contracts changed hands on the COMEX in January as prices started 2004 with a surge to 15-year highs, then collapsed in the month's last session as per the NYMEX data. The total for January exceeded the previous monthly record of 1,397,296 contracts traded during November 2003, when gold broke above $400 an ounce for the first time since 1996.

A strong data on US January manufacturing and December construction spending supported the economic recovery story and helped shore up the dollar, which only three weeks ago was plumbing record lows against the five-year-old euro. Last week saw a shift in the monetary policy meeting of the Federal Reserve as it dropped its pledge to keep rates on hold for a ``considerable period,'' instead saying it ``can be patient'' about lifting rates. However, this was followed by a weaker GDP at four percent leaving doubts on Fed's recent statements.

Gold prices moved as per expectations correcting lower. The psychological level at $400 gave way and prices tested close to $394 before finding support from there. A long term rising trend line support point lies at $384.50 and this level should hold the downside for a resumption of the up trend. This also happens to be close to the Fibonnaci 38.2 per cent retracement level from $318 to the recent high at $430. Using Elliot wave analysis, the fifth wave impulse wave rally failed on the break of $403, and we should now be in the fourth wave correction targeting $385 on a bigger picture.

RSI after being in the overbought zone for quite some time moved lower and is now in the neutral zone indicating that it is neither overbought nor oversold. As noticed last week a negative divergence is in the indicators was also a reason for the correction witnessed, where prices have made a higher high, which is not confirmed by a higher high in the indicators. The averages in MACD, have gone below the zero line of the indicator which could be a indication of a bearish signal. Prices are below the short- term 9-day EMA at $405 and the medium term 25 day EMA is at $412. A daily close above the two moving averages will signal the beginning of another rally in gold. Look for prices to correct lower. Supports are at $398, $394 & $385. Resistances at $405, $413 & $430.50 respectively.

(The author is a trader at Scotiabank and the views expressed by him are his own and not necessarily of his employer. This analysis is based on the historical price movements and there is risk of loss in trading.)

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