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Gold Prices: Don't Fight the Fed

Gold Prices: Don't Fight the Fed

2016-05-25 19:51:00
James Stanley, Currency Strategist

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Talking Points:

  • Gold Technical Strategy: Previous long stopped out on break below $1,250
  • Gold is putting in a massive reversal of the prior up-trend on the back of rising expectations for a Fed rate hike in June.
  • If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator.

In our last article, we looked at a long position in the effort of catching a continuation move in Gold. The motivation for the trade was both technical and fundmental, as, at least at the time, it appeared unlikely that we’d be anywhere near a rate hike out of the United States anytime soon. But that prospect has changed markedly after the release of the April FOMC minutes, as the Fed basically communicated that they felt markets were under-pricing the probability of a rate hike in June. Since then, we’ve heard numerous Fed members speak on a similar theme, and expectations for a hike in June have continued to rise.

When the underlying facts of a hypothesis change, so must the trader’s approach on the matter.

While this doesn’t mean that a hike is definitely coming in June (or July or even September for that matter), it does mean that we can see some continued reversion of the prior up-trend as markets wrestle with rate hike odds out of the Fed for the remainder of the year. But longer-term, the technical structure of Gold remains bullish; and until support levels at $1,217.26 (38.2% retracement of the prior move) and then at $1,200.41 (61.8% of the ‘big picture move’ from the 1999 low to the 2011 high) become violated, that will remain the case.

Given the aggressiveness with which prices have fallen, traders would likely want to avoid looking to play direct reversals off of the $1,217.26 level; instead waiting for near-term price action to indicate further bullishness (higher-highs, higher-lows on the four-hour chart) before looking for long positions. Should price action form support at or around the $1,200 level, that may become attractive for top-side reversal plays.

The short-side of Gold may become more attractive as we move nearer to that June rate hike decision out of the United States. Traders would likely want to wait for price action to show some element of resistance before looking to get short, as Gold just put in a bounce off of a ‘lower-low’ support level. The prior swing low is nearly $20 higher on the chart around $1,245, and should price action move up to find resistance in this zone, short-side plays could become attractive with stops above the prior swing high in the $1,260-area.

Gold Prices: Don't Fight the Fed

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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