By Kira Brecht
Monday December 05, 2016 10:10

(Kitco News) - Dec. 5 – Gold traders are not in a cheery mood this holiday season. Sellers used the overnight bounce in gold, following the Italian "no" vote as the country rejected a spate of constitutional reforms – as a fresh selling opportunity.

Is it time to catch the falling knife in gold? Here are three factors traders can weigh now.  

1. Fed rate hike could trigger gold rally
2. The daily gold contract is oversold and ripe for a bounce
3. The weekly gold chart shows a test of Fibonacci retracement support

Next Week's Fed Rate Hike

The Grinch is stealing Christmas when it comes to the gold as traders back away from the market amid widespread expectations of an interest rate hike at the Federal Reserve's meeting next week. Yet. . .

An interest rate hike has been priced in – and the actual event could trigger a "Sell the rumor, Buy the fact" type of rally after Fed Chair Janet Yellen and team finally increase interest rates this year.

Daily Gold Chart Is Oversold

Looking at the daily chart outlook, a potential bearish outside day is forming on Monday in Comex February gold futures. That is a negative sign and defines Monday's early high at $1,190.20 as strong initial resistance.

On the downside, initial support lies at $1,162.20. The market has probed into an old gap from February (look left on the chart), which offers support at $1,160.90. If that cracks, there is a vacuum of significant support and gold will become vulnerable to slippage back toward the December 2015 lows.

However, daily momentum is oversold, with the 14-day relative strength index coiling below the 30% oversold line. Sustained readings above the 30% zone would be needed to confirm an improvement in the momentum outlook. Gold has suffered a big sell-off since the U.S. presidential election results. The market is oversold and that is a factor for traders to consider. An oversold reading does not equal a buy signal, but it does reveal that gold is ripe for a consolidation or rally at any time.

Key Fibonacci Test

The longer-term gold chart is deteriorating – and market is at a key level now. Figure 2 below reveals a weekly continuation chart of Comex gold futures. A Fibonacci retracement is drawn off the December 2015 low into the July 2016 high. The 6.18% level around $1,171.80 appears to be cracking. Sustained losses below the 61.8% level will leave gold vulnerable to a 100% retracement of the December 2015 – July 2016 rally wave, which leaves a bearish objective at $1,046.20.

Putting It All Together: It Could Get Worse Before It Gets Better

The gold market has taken it on the chin in recent weeks. Sentiment has turned negative and there may be more to go on the downside. The Fed meeting next week could open the door to a "Buy the Fact" type of rally – especially since daily momentum is oversold.

However, traders should keep an eye on the weekly chart as well. Sustained declines below the 61.8% Fibonacci retracement level would leave gold vulnerable to another selling wave before the dust settles.

Longer-term physical buyers are waiting in the wings – hoping that they can sniff out even better buying levels before the year ends.