Gold support breach points to deeper breakdown

Gold has broken below a critical support level, with further downside looking likely from here on in.

Gold
Source: Bloomberg

Gold has been under pressure over recent months, with the resurgence in the US dollar and a bullish economic environment helping dispel any fears over a breakdown of global trade, thanks to US-led trade talks.

The price of gold has finally broken below the critical $1236 support level this week, with significant bearish consequences to that breakdown. The weekly timeframe highlights the continued creation of higher lows since the market bottomed out in the fourth quarter (Q4) of 2015. That move seems to set us up for a protracted period of downside for gold, with the weakness seen throughout the past three months unlikely to be the end of the selling. With the price trading within an ascending triangle formation over the past two years, this eventual bearish breakdown signifies that we could move into a more trending market environment. That break of the $1236 level not only negates the creation of higher lows since 2015, also completing a double top formation and breaking the 200-week simple moving average (SMA) in the process.

With gold looking set to lose further ground, it is worthwhile watching for $1205 as the next key level of support. Given the extended pullback seen through recent months, there is always a risk that we will see some form of rebound to retrace some of that downside. However, the shorter-term charts should tell us what we need to know about such a rebound.

On the four-hour chart, there is a clear downtrend intact, with the creation of lower highs and lower lows key to telling us whether we will see further downside or that wider rebound. With that in mind, further downside looks likely as long as the price does not rally through $1228 resistance. Given the long lower shadow on the previous candle, there is a chance that we could see a short-term bounce. However, that would be seen as a selling opportunity, with the 61.8% and 76.4% Fibonacci levels providing areas to short gold if they are reached.

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