Chart Watch: Yellen Could Be Catalyst For Gold Pullback

By Kira Brecht
Monday February 13, 2017 09:47

(Kitco News) - Feb 13- Gold prices edged lower in early trading Monday as traders await key testimony from Fed Chair Janet Yellen before Congress this week. The Fed Chair is slated to testify before Senate and House committees on the state of the U.S. economy and traders will be watching closely for clues on the timing of the next interest rate increase.

The market is pricing in expectations for a June 14 interest rate hike, with odds seen at 47.9% for a 25 basis point increase at that meeting, according to the CME Group FedWatch tool. Currently, the market is only pricing in a 17.7% chance of a rate hike at the March 15 meeting. If fresh comments emerge at this week's testimony that the Fed could pull the trigger earlier than June that could act as a catalyst for additional short-term gold price weakness. Gold pays no interest or dividend and rising interest rates are seen as a negative factor for the yellow metal.

Chart View

The minor trend is bullish for the gold market, which has rallied soundly since mid-December. Last week, Comex April gold futures breached a minor technical level at $1,237.70, the Nov. 16 high and the bullish objective for the current rally phase. That also roughly coincides with the 50% retracement of the Nov.9-Dec. 15 sell-off. Momentum has turned down from overbought levels, seen in the 14-day relative strength index seen below the price chart in Figure 1 below.

The most recent bearish momentum turn occurred on Jan. 17 and presaged a minor short-term correction phase, see Point A labeled on the chart below. Point B signals the current bearish momentum turn.

Key Levels in Gold

On the downside: the gold contract has scope toward major support at $1,182.60 on a corrective pullback. A potential "hook" for support is seen at the rising 20-day moving average at $1,216.70 and then $1,208.30, the Feb. 3 low. As long as the prior swing low at $1,182.0 holds firm, the minor uptrend will remain intact.

On the upside: resistance lies at $1,237.70-$1,246.60, the latter representing last week's high. Beyond there lies the 61.8% Fibonacci retracement of the post-election sell-off, which comes in $1,261.10. A solid and sustained rally above the 61.8% retracement is needed to open the door to a return to the $1,300 zone and higher.

Plan Your Trade and Trade Your Plan

In the short-term: the near-term chart picture remains positive for gold. Markets don't go in a straight line up or down forever. A little backing and filling will ease the recent overbought momentum readings, and leave the gold trend healthy, strong and poised for a fresh rally phase. A short-term pullback could offer fresh buying opportunities for long-term traders or short-term swing players.