Posted Thursday July 29, 2010 1700EDT

XAU/USD

Support

   1155 Weekly Ichimoku Kijun line

   1150 200 day simple moving average

   1124 April 19 intra-day low

Resistance

   1181 Broken daily trend line (rising); Tenkan line; 1183 is 100-day mov. avg.

   1193 21-day mov. avg./down channel top (falling); 1195 is the daily Ichimoku cloud base

   1210 Daily Kijun line; 1213 is 55-day mov. avg (falling)

Comments

Spot gold prices have broken below a major daily trend line dating back to November 2008, now resistance at about 1180/81 and rising. Additionally, prices have made a decisive break lower out of the daily Ichimoku cloud, which also suggests an overall shift in trend to the downside. The price declines have been driven by a rebound in the Euro, as fears of a currency crisis in Europe have faded, lessening demand for gold as a currency-alternative. Increasing fears that the US may be facing higher risks of deflation have also reduced the demand for gold as a hedge against inflation. We think low inflation/potential for deflation will continue to weigh on gold ahead as the US slowdown eventually pulls down overall global growth. Concerns about the implosion of the EUR also seem most likely to fade further. In the short-run, USD weakness may provide for a rebound in gold which we would view as a selling opportunity.

The strategy will look to sell half of a short XAU/USD Gold position in the 1180/83 area and the second half at 1193/95 area for an average short rate of around 1187/89. The stop loss will be on a daily close above 1203 or if 1210 deals at any time, for a total risk of about $22/oz. The take profit objective will be for 50% at 1124/25 lows from April 19, and the remaining 50% at 1093/95 weekly Ichimoku cloud top. Stops will be adjusted to breakeven on a daily close below the key 1150/55 support zone. A more conservative strategy would wait for a daily close below 1150/55 before going short.