Gold Bounce Incoming? 3 Reasons Not to Short $4,000

The gold price has trended down since January. But at around $4,000 per ounce today, this is a poor spot to short. Here are three reasons why a 10% bounce could be fair game.

Gold’s bigger picture is still bearish

Gold peaked on 29 January ($5,599) and has dropped about 28% since. Back in April I wrote about three bearish signals for gold. In May, I also said the gold price could break below its 200-day moving average and head lower. It did.

The bigger trend is still down for gold – and it’s technically in a bear market until proven otherwise. But even bear markets can have tradeable bounces.

Why $4,000 is a bad spot to short gold

Three things line up for a bounce. 

First, gold is on long-term price support. The green box between $3,800 – $4,050 is where buyers showed up in November last year. As every seasoned trader knows, you don’t go short into support. That’s where going long usually has the better risk-reward trade-off.

Second, there’s bullish divergence forming between gold and the relative strength index (RSI). Gold dropped to a lower low while the RSI put in a higher low. In plain English, it means selling pressure is fading, according to the indicator. So it could be harder for sellers to push the price lower.

Third, $4,000 is a round number – and you know how I like round numbers in trading. After a big drop, round numbers tend to pull in buyers. 

That sets up a potential range trade. The idea stays alive above the green box, with the red box as the target. That’s roughly 10% up (depending on the exact entry point) against a much smaller risk. 

Shorting gold has worked great all year – but now the chance of a bounce has gone up. In a downtrend, it’s best to short the rips into resistance.

Not the dips into support.

As usual, none of this is investment advice. I can be wrong, just like everyone else. To learn more about trading price levels, check out our Support and Resistance guide.