Will Gold See A Tradable Bounce Off $1200 Support?

There are no two ways about it: 2018 has been an absolutely brutal year for gold bulls.

The yellow metal came into the year with some impressive momentum, rallying from around $1240 in mid-December to hit a peak above $1360 by late January, but the proverbial “wheels have fallen off” since then. Gold held up relatively well for the first four months of the year, with prices consolidating between $1300 and $1360 until the fateful break below $1300 in mid-May. In the last two months, prices have fallen in seven of the past eight weeks, and if today’s price action is any guide, bears will try to push that streak to eight of the past nine weeks.

As experienced traders know, it’s often when the outlook couldn’t look bleaker that prices unexpectedly reverse. There are certainly some technical signs that are pointing to a potential bounce in the yellow metal. Most prominently, gold is coming into a key support area; the $1200 area put a floor under prices in both March and July of last year, leading to a $1,000+ bounce on each occasion.

In addition, both the daily and weekly RSI indicators are in oversold territory. The daily RSI is showing a triple bullish divergence over the last five weeks (with the RSI making three “higher lows” while the price of gold itself has made three “lower lows”), signaling waning selling pressure on each leg lower, a development that often foreshadows a bullish reversal in price itself.

Finally, the latest Commitment of Trader report from the CFTC shows that sentiment toward gold may be reaching a bearish extreme. Speculators as a whole are holding the fewest net long positions in the yellow metal since the start of 2016, while money managers, in particular, have their heaviest net short position in gold on record (back to 2006). With traders positioned for a continued one-directional move lower and prices testing a key support level, gold could be vulnerable to a sharp bounce in the coming days or weeks.