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Gold: Overbought RSI to Spark Dip-Buying Opportunity Amid Geopolitical Tensions

Published 04/15/2024, 05:34 AM
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  • Gold rebounded after Friday's bearish close but another correction cannot be ruled out.
  • Despite Friday's record high, gold faced selling pressure later, signaling possible short-term losses.
  • Traders eye key support levels, like Friday's low at $2333, amid overbought signals from the RSI.
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  • Gold managed to bounce back after Friday’s bearish close, albeit the positive moves in European stock markets and oil’s negative response to the weekend’s events point to reduced haven demand.

    So, there is a risk that the yellow metal could turn lower and continue its sell-off that began on Friday, when its latest rally to a new all-time high was met with strong selling in the second half of the day, resulting in a bearish-looking price candle on Friday.

    On Friday, gold breached the $2400 mark to hit a new all-time high of $ 2431 per ounce, as traders sought safety on reports of Iran's plans to attack Israel over the weekend, sparking demand for safe-haven assets. It then retreated by the session's end as technical signals suggested its rally had become overheated. However, the latest events in the Middle East reignited the flight to safety first thing on Monday’s session, with concerns about potential Israeli retaliation discouraging bearish bets on gold.

    Still, after Friday’s bearish price action, we may well see this modest bounce fade as today’s session wears on. Should a downward correction materialize, it should be viewed as nothing more than a corrective action, likely attracting side-lined buyers at lower levels.

    That is unless there's a significant shift in the US interest rate outlook or a sudden de-escalation in geopolitical tensions, neither of which appears imminent in the near future.

    Gold technical analysis and trade ideas

    Following Friday’s reversal-looking price action, when the metal dropped sharply after hitting a new record high, traders will be wondering whether more short-term losses could be on the way this week before we see fresh dip-buying again.

    Gold Daily Chart

    There hasn’t been any immediate downside follow-through so far in the day on Monday. But keep a close on $2333, Friday’s low, should we get there later on in the day.

    A breach below this level, if sustained, could trigger further technical selling below it, potentially leading to a drop to support at $2300 initially ahead of $2270-80 area next, which corresponds with the convergence of the short-term bullish trend line and 21-day exponential moving average.

    Gold’s long-term charts certainly look bullish, but there is no doubt that prices also appear overbought on multiple time frames. Thus, a bit of further weakness in the short term should not come as a surprise.

    Last week saw gold trade above the 161.8% Fibonacci extension of the 2020-2022 downswing around $2360 to rise to a new record of $2431 by Friday.

    The bearish close on Friday, though, is signaling caution for a potential reversal. Additionally, the Relative Strength Index (RSI), a momentum indicator, is at exceptionally high levels across various time frames, indicating overbought conditions.

    These conditions can normalize over time. It can do so by simply maintaining around its current levels for several days without significantly retracing.

    Such a scenario would be favorable for gold investors, given the metal's rapid price increase in recent days. The RSI’s overbought conditions can also be worked off through a sharp pullback.

    Below the short-term support levels mentioned, a more significant area of potential support comes in around $2222, which resides in the area between $2195 to $2236. As per the weekly chart, this is where the most recent phase of the rally started a couple of weeks ago.

    The next level on the downside would be the December high at $2146 and finally that long-term pivotal zone of $2075-$2081, which is now the most important long-term technical area on gold.

    Gold Weekly Chart

    On all of the gold charts, one thing that is in common is the RSI indicator being in overbought territories. The daily RSI is at 72.0, while both weekly (78) and monthly (>70) RSI indicators are also at extreme levels.

    Gold is therefore looking rather overbought, judging by the RSI indicator – in fact by almost any metric you employ. And following Friday’s bearish-looking price candle, I would favor looking for sell trades insofar as the short-term is concerned, even if my long-term view remains bullish.

    Historically, whenever gold has surpassed the overbought threshold, particularly on long-term charts, it has typically been followed by a sell-off. While past trends don't guarantee future outcomes, the possibility of gold declining somewhat from its current levels can't be disregarded, especially considering its rapid rally.

    However, any potential pullback in the near term might not signify the end of the longer-term upward trend. Instead, traders and investors who didn't get the opportunity to buy gold at lower prices are likely to use any dips as a chance to enter the market, once gold is no longer technically overbought.

    ***

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    Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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