Upside Could be Capped for Now

Gold, XAU/USD, Silver, XAG/USD – Technical Outlook:

• Gold has risen above support-turned-resistance 1675-1685 mark.
• Silver has shown some upward momentum but is still within its recent range.
• What is the outlook and what are the key levels to watch?

GOLD SHORT-TERM TECHNICAL OUTLOOK – BEARISH

Gold has recovered quite sharply after falling last month below strong horizontal trendline support at 1675-1685. While this may have changed the very near-term outlook (a few days) to neutral, the overall bias remains down for two reasons.

Firstly, while the rebound has been fairly strong, gold hasn’t been able to decisively clear support-turned-resistance at 1675-1685. The initial spurt in price action seems to have stalled around the resistance, which isn’t surprising given the significance of 1675-1685 (make or break situation for gold over a multi-week / multi-month time period), as this column highlighted a few weeks ago.

XAU/USD Daily Chart

Chart Created Using TradingView

Moreover, since the decline started earlier this year, the yellow metal hasn’t been able to break above crucial resistance on the 89-day moving average (DMA; see chart). To be fair, the current rebound could be similar to that of July-August – the rally ran out of steam around the average.

Hence the bias for gold remains down for now unless it is able to clear resistance at 1735-1750 (including the mid-September high and the 89-DMA). Any retreat could push gold towards 1660-1670 (including the early-October low). A decisive break below the September low of 1614 could be a strong sign that gold had resumed its medium-term downtrend.

SILVER SHORT-TERM TECHNICAL OUTLOOK – NEUTRAL

Silver’s gains have stalled after the rally in the earlier part of the week as it tests a tough hurdle on a horizontal trendline from May at about 20.50. The 20.50-21.00 area is fairly strong resistance (including the 200-week moving average and 38.2% retracement of the fall from March), so it would be tough for silver to break the barrier easily.

Hence there is a chance of a minor retreat towards 20.00, which should cushion the downside. Furthermore, given the Positive Directional Movement Index on the daily chart is above 25, the downside could be contained (see chart). In this regard, the converged support area of 17.50-18.00 is quite strong.

XAG/USDDaily Chart

Chart Created Using TradingView

In sum, as this column noted in late September, the overall bias for a few weeks is that of mild recovery/broad range. That is because positive momentum divergence (lower price associated with rising momentum) on the daily and weekly charts point to at least some consolidation following the slide from earlier this year.

However, beyond a few weeks, while the balance of risks is tilted towards the downside, it remains to be seen if Silver is able to break above crucial resistance at 22.00-22.50 (including the 200-day moving average and the June high). A decisive break above the resistance would meaningfully fade downside risks and raise the possibility of an extended sideways price action.

–— Written by Manish Jaradi, Strategist for DailyFX.com