Gold Prices Showing RSI Divergence - Caution to Bulls

2016-07-11 17:49:00

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Talking Points:

Gold Technical Strategy: Gold prices continuing to hold post-Brexit, NFP gains while USD remains near resistance.
The aggressive up-trend in Gold combined with the fundamental back-drop could make shorts unappealing in the interim.
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 the continued up-trend in Gold with the price action around Brexit proving especially interesting. In the week leading into Brexit, Gold prices were smashed lower by nearly 5%; moving from a June 16th high of $1,315.48 down to a pre-referendum low of $1,250.11. But as polls came in showing a higher-than-expected turnout of voters for the leave camp, capital flows began to gush into Gold at a hastened pace, with prices spiking-up to $1,358.10 for a +8.64% movement in less than six hours. The fact that this movement came-in while the US Dollar was also throttling higher indicates that there was a ‘safe-haven’ like drive in both markets; and this has yet to abate in either Gold or USD.

The complication of getting long in Gold is the same as we looked at in our last piece… with price action continuing to congest near resistance without much of a retracement in the recent past; traders are faced with the challenge of buying a relatively overbought market. And while RSI on the daily chart has just moved below overbought territory, RSI divergence is showing on the 4-hour chart, indicating just how stretched this market has become.

(Gold 4-hour chart – please click image for larger view)

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

Alternatively, the short-side could be seen as unattractive given that moves-higher in USD would likely need to be driven by expectations for higher rates; and such a provocative move from what’s become such a passive Central Bank could be difficult to forecast in the current climate littered with more stimulus on the way from Japan, concerns around Brexit, Europe, etc.

So, the up-trend is still attractive here; but traders would likely want to wait for a deeper retracement before looking to trigger. Given the violence with which top-side moves have come-in, being driven by fears around Brexit or hopes for more Japanese stimulus, prudence is of the upmost importance as the trader may need to sit in the position as it grinds against them before finally catching a bid.

Price action around NFP reiterated that message as the blowout headline print initially stoked fears of a more hawkish Fed. Gold put in a quick down-side spike of over 2% in six minutes. But as the internals of that report were digested, showing that unemployment actually went up and came in above-expectations, the predominant theme of Fed-passiveness took back over and the top-side move in Gold resumed. This is the type of heat that one might have to endure if sitting in a long Gold position while we’re sitting near two-year highs.

On the chart below, we look at recent price action structure in Gold to look for potential areas of support in the effort of trading top-side continuation in the Gold-trend.

(Gold Daily Chart – please click image for larger view)