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Gold rally tailing off as consolidation threatens to open the door to renewed selling

Trading outlook:
How gold reacts around the key resistance band $1902/$1926 could be crucial to the near term direction. A bull failure on Friday and early weakness today leaves a recovery outlook highly questionable. The near term outlook is very much on a knife edge now. Closing below $1881 would suggest a return of near term pressure on $1848 again. The bulls need closing levels well clear of $1902 to regain confidence.

 

 

Fundamentals/Newsflow

The dollar is consolidating. Gold is consolidating. Traders are trying to figure out what the COVID infection for Donald Trump means for markets.

It is interesting that this is all coming as Dollar Index consolidates around 93.50/94.00 old breakout support band and gold consolidates around the $1902/$1926 resistance band of the old August/September floor. The strongly negative correlation between the two continues.

There have also been just a few hints in the past session or so that the positive correlation between equities and gold may be starting to break down. Gold was beginning to resume its more traditional perception of a safe haven asset on Friday, initially higher then falling over. A further fall early today as equities have been positive this morning add to this view.

However, we will need to watch how this develops, as we still see gold and the dollar as strongly negatively correlated. It would mean gold struggling as risk appetite improves (if equities sustain a move higher), but also gold could struggle if the dollar begins to rally again. This may make for a difficult near term outlook for the gold bulls.

Near term weakness is a chance to buy gold. Looking longer term, we believe gold will be supported by a “lower for longer” dovish Federal Reserve monetary policy outlook. The willingness to accept higher inflation and not hike rates until 2023 will keep real yields subdued/negative and should mean that gold remains attractive. Subsequently, this is still a good environment to be buying gold into supported weakness.

 

Support
  • $1881/$1882 – 29th September low and near term pivot
  • $1876 – 29th September low
  • $1848 – 24th September low
Resistance 
  • $1917 – 2nd October high
  • $1920 – old 9th September low and 22nd September high
  • $1926 – 23.6% Fibonacci retracement of $1451/$2072 big bull run

 

Technical Analysis

Our concern with the rally on gold has always been that the significant overhead supply between $1902/$1926 would see the bulls struggle. Is it a decisive bull recovery or a near term unwind before continued correction. The market remains at a crossroads but a close back under $1900 on Friday and early weakness today leaves the outlook for the bulls looking precarious again. The RSI unwinding towards the high 40s and then turning back, whilst the Stochastics are losing their upside momentum too.

The hourly chart shows initial support around $1889 is now being tested this morning, but a move back under $1881 would be a sign of bull failure. The hourly momentum indicators do not bode well either. The hourly RSI is now around 5 day lows (under 40), whilst hourly MACD lines are around 5 day lows under neutral. Another bull failure under $1900 would add to a growing sense that the buying pressure is drying up. Resistance at $1917 is becoming increasingly important near term now.

 

STRATEGY: Gold is beginning to tail off around the resistance band $1902/$1926. Downside pressure would grow on a closing breach of $1881 support and would open $1848 again, for possibly a test of $1818/$1835 in due course. The bulls need a close above $1926 to begin to suggest a more positive outlook forming again. How the market resolves this near term uncertainty will be key as we still see a bullish medium to longer term outlook on gold  and that near term weakness is a chance to buy.    

 

Richard Perry

Richard Perry

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