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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Profit-taking hits gold, but how has the outlook changed?

Trading outlook:
With an intraday exhaustion at $1980, gold is beginning to pull sharply lower this morning. A near term correction to the strong run is gathering pace. Profits are being taken as the momentum has shifted. We position now for a pullback, but would wait for support to form before looking for the next buying opportunity.

 

 

Fundamentals/Newsflow

There is a pullback on the recent hugely stretched near term positioning on the dollar and gold.  Whilst we see these moves as near term retracements, is may be difficult to stand in the way of them if they really snap back hard. We also see moves primarily technically driven, but they also come ahead of month end (closing out positions?) and a Fed meeting. Time for some profits to be taken then.

We see here that the correlation on gold and the US dollar is almost as strong as it could possible be still. A dollar rebound, is playing into the gold pullback too. This could mean that Dollar Index pulls back into overhead supply in the band 94.63/95.70 and potentially a further 2%/3% pullback on gold, meaning the mid-$1800s are in play.

 

It is interesting that this has also come as Treasury yields (the US 10 year) have picked up too. Whilst we do not see this as a primary driver of gold right now, they are still worth watching, especially with the FOMC announcement tomorrow.

 

Once these near term corrective moves play out and settle down, we still see fundamentals underpin a stronger gold price and point to continued support for gold. Loose global monetary policy for many months (and possibly years) to come, will keep real yields subdued/negative and should continue to mean gold is attractive. Subsequently, this is still a good environment to be buying gold into weakness.

 

Support
  • $1905 – 24th July high
  • $1898 – 23rd July high
  • $1878 – near term pivot support
Resistance 
  • $1930 – near term pivot now resistance
  • $1947 – intraday rebound high 28th July
  • $1980 – intraday high on 28th July, currently the all-time high

 

Technical Analysis

Throughout the bull moves of 2020 on gold, almost all have culminated in an intraday bull failure and an exhaustion candle on the daily chart. So, with the daily RSI closing at 85 yesterday (massively stretched) and coming into the European session with a potential “shooting star” candlestick, the prospects for a profit-taking reversal are growing. Hitting a high of $1980 early this morning, the market had already unwound $40 as the Europeans took over, and now this move is going further.

We have been looking for potential reversal signals on the hourly chart for a few days, but none have been confirmed. However, the reversal signals are now triggering. A negative divergence on the hourly RSI has formed, but also with the hourly RSI dropping to its lowest in over a week. The support at $1930 held very well throughout yesterday’s session but this has broken and now means that it becomes an important gauge of resistance now. The move has decisively broken the 21 hour moving average (which has been a very good basis of support for the past six sessions of this bull run) and this looks to be the bull move over, at least for now. There has also been an uptrend of the past week on the hourly chart coming in at $1928 which has been broken this morning.

A decisive breach of $1930 support has opened $1898 as the next near term pivot. Given how overbought this move has become, the potential for a retracement towards $1845/$1860 could be seen. Completing a shooting star candlestick today would add to that near term corrective potential.

 

STRATEGY:  We finally seem to be seeing a pullback on gold setting in as profit-taking signals are triggered. Below $1898 would open further pullback towards $1845/$1861. However we would view a near term correction into support as another chance to buy for further medium term upside in due course.     

 

Richard Perry

Richard Perry

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