(Kitco News) - December Comex gold futures popped higher in overnight action in a corrective bounce after last week's heavy losses. The near term trend points down for gold, but the market is oversold and vulnerable to a modest retracement higher.
But, is the rebound higher just a "dead cat bounce?" Watch action around the early June lows this week.
Last week's selling pressure tugged gold below the all-important early June lows seen on Figure 1 below, marked as "A." That zone comes in around $1,241.70-1,242 and is the last major price support zone ahead of the December 31, 2013 low at $1,185. Gold bears broke below the $1,241.70 floor last week, but daily momentum hit oversold territory and the market has been in an extended decline hugging the lower daily Bollinger Band® line.
These technical indicators show gold is ripe for a modest bounce higher in the very short-term. The bulls and bears are battling for control around the early June lows. The $1,241.70-1,242 area could act as a short term stalling point and gold could recover back above that floor in the very short-term. The 20-day moving average, seen at the middle Bollinger Band line is resistance and a bullish target at $1,269.80, but that point could well be out of reach. It would take a rally back above the 20-day moving average this week to improve the short-term outlook.
In related market action, the U.S. dollar index has formed a classic "bull pennant" pattern. See Figure 2 at the bottom. There is a large typical "flagpole" and now the dollar is forming the flag portion of this continuation pattern. It has not been confirmed yet, a strong upside breakout above the top trendline would be needed to unleash a fresh buying wave for the dollar index. This week's U.S. Federal Open Market Committee (FOMC) meeting could provide fodder for the dollar index to blast higher out of this developing pattern.
If the dollar index confirms the bull pennant —that would in turn put pressure on gold once again. And, any gains seen early in the week in the yellow metal could prove to be merely a dead cat bounce.
By Kira Brecht, Kitco.com
Follow her on Twitter @KiraBrecht
