Gold May Bounce on S&P 500 Recovery, Oil Technical Setup Favors Losses
Commodities – Energy
Crude Oil Technical Setup Points to Deeper Losses
WTI Crude Oil (NY Close): $97.70 // -1.79 // -1.80%
Prices continue to consolidate below the 50% Fibonacci retracement of the drop from the May 2 high at $104.73, with anything shy of a daily close above this boundary keeping the overall structure bearish. A descending triangle formation above $94.65 bolsters the case for downward continuation, with a daily close below the pattern’s lower boundary initially exposing $91.90.
Risk sentiment trends remain in focus with the WTI contact still intimately correlated with the S&P 500 on short-term studies. With that in mind, a corrective bounce looks likely on Tuesday, with futures tracking the US stock benchmark up 0.2 percent in overnight trade. Another disappointing set of US economic data could undermine optimism however, with the Richmond Fed’s manufacturing activity gauge due to drop for the third consecutive month in April to the lowest level since November 2010, while New Home Sales stall having added 11.1 percent in the previous month. Preliminary weekly inventory figures from API are also on tap.
Broadly speaking, the overall landscape continues to favor the downside, with the June expiry of QE2 remaining as a significant headwind facing the spectrum of assets that had benefitted from investors’ access to cheap funding through the program. Furthermore, renewed Euro Zone debt fears show no signs of ebbing, with Greek 5-year CDS rates up another 22.1 basis points overnight to show investors see the threat of default at the highest in a month.
Commodities – Metals
Spot Gold (NY Close): $1517.03 // +4.72 // +0.31%
Prices continue to consolidate between $1519.55, the 50% Fibonacci retracement of the drop from the May 2 high and a rising trend line set from late January. Piercing this downside barrier would amount to a material, medium-term trend change, opening the door for protracted gold weakness over the coming weeks. Initial downside targets line up at $1462.05 and $1444.00. Alternatively, a break higher exposes the 61.8% Fib at $1533.12.
Gold remains firmly correlated with the S&P 500, with index futures moving higher to hint the metal is likely to remain supported on Tuesday. As with oil however, another soft set of US economic data may prove to undermine sentiment anew. With that in mind, it should be noted that given the focus on June’s expiry of the Fed’s QE2 program over recent weeks, a dour set of US data may be interpreted to mean the central bank will not rush to unwind stimulus measures and actually prove supportive for risky assets.
Spot Silver (NY Close): $35.076 // +0.003 // +0.01%
Prices continue to consolidate below $36.44, the 23.6% Fibonacci retracement of the 4/25-5/6 decline. A push higher through this barrier exposes the 38.2% level at $38.99. Near-term support lines up at $32.32.
The correlation with the S&P 500 remains significant, hinting silver remains anchored to broad-based sentiment trends and is likely to rise as stock index futures tracking the US benchmark creep higher overnight.
The gold/silver ratio has been little changed over recent days, but as we have noted previously, the cheaper metal is likely to outperform when risk appetite is on the rise, as seems to be the path of least resistance over the next 12-24 hours.
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