Gold, silver: Buying the dip needs a health warning given heavy price action

• Gold and silver have extended Monday’s substantial losses on Tuesday
• Technicals and/or positioning may be behind the reversal, rather than fundamentals
• Selling rallies remains the preferred play

The bigger the rally the harder the fall? Traders dabbling in the precious metals space may be asking that exact question with gold and silver extending their losses on Tuesday after a brutal start to the week.

Precious metals looked heavy before Monday’s rout

While there have been plenty of narratives bandied about to explain the sudden reversal, including a perceived lessening in geopolitical tensions, given the unconvincing price action last week – before the tensions apparently lessened – it suggests the move has been driven by techncials or positioning, rather than fundamentals: the US dollar remains strong, real and nominal bond yields are high, US inflation concerns have not dissipated, nor US fiscal concerns.  And it’s a big assumption to assume geopolitical tensions have truly eased.

I discussed the iffy price action in a trade idea on Monday, noting several price and momentum signals were warning of downside risk. Now the trade has worked, it’s time to look at what may happen next.

Gold finding bids below $2300… for now

Turning to gold first, the price has bounced in Asia after a quick foray below $2300, attracting bids from a minor support level at $2305 established earlier this month. While the bounce suggests gold may resume the uptrend it’s been in since the start of March, momentum indicators such as RSI and MACD continue to point to downside risks, making me more inclined to sell rallies rather than buy dips near-term.

Should gold push back towards former horizontal support around $2327, it generates a trade setup with decent risk-reward given the heavy price action, allowing for traders to sell ahead of the level with a tight stop above for protection. The initial target would be $2296, the low hit earlier in the session. Beyond, $2265 comes into the equation. If the trade were to move in your favour, you could move your stop to the initial entry level, providing a free hit on downside.

Silver looks sick after breaking channel support

As for silver, the price action looks even more suspect with the price breaking out of the ascending channel it had been trading in since late February. While it has attracted bids below $27, as was the case earlier this month, like gold, momentum is to the downside. Hence, selling rallies remains the preferred option near-term.

Those considering taking on the short trade could wait for potential pops back towards Tuesday’s high around $27.30, allowing for short positions to be established with a stop above the former channel support for protection. The initial target would be the current session low of $26.78, with a break there opening the door for the price to retest the trendline established in late February. If the trade works in your favour, consider lowering the stop order to the initial entry level.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

1. Open an account, or log in if you’re already a customer 
   
   • Open an account in the UK
   • Open an account in Australia
   • Open an account in Singapore
   
   
2. Search for the market you want to trade in our award-winning platform 
3. Choose your position and size, and your stop and limit levels 
4. Place the trade