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Talking Points:
- Gold Technical Strategy: Longer-term bullish uptrend in question; near-term aggressively bearish momentum.
- Gold prices broke below the prior major swing low of $1,250, set just ahead of the Brexit referendum.
- If you’re looking for trading ideas, check out our Trading Guides.
In our last article, we looked at Gold prices trading in a bull flag formation for nearly three months after having set a fresh high of $1,375 in early July. Since that high was set, markets have seen numerous instances of commentary from Federal Reserve members indicating that a near-term rate hike may be in the cards; and this has helped to strengthen the US Dollar, creating a deeper retracement in Gold prices.
This theme was front-and-center last week as FOMC member Loretta Mester said that the case for a rate hike in November would be strong. This caught markets by surprise as the November FOMC meeting is just a week ahead of US elections, and this would very much be a change-of-pace from the talk-heavy, act-light historical patterns of the Fed over the past nine years. This helped to create a quick rush of demand in the US Dollar, and this burst of strength in the Greenback helped to initiate a deluge in Gold prices.
Gold prices dropped by as much as $78 last week for a total move of near -6%. Over the longer-term, Gold prices are still in a bullish state and will likely be so until prices fall below the psychological level of $1,200; but near-term, Gold is very much in a bearish position as price action has cracked below the ‘Brexit-low’ of $1,250; and moves higher appear to be getting sold. This near-term bearish state can remain in Gold prices as long as the Fed is talking up the prospect of higher rates. Much as we’ve seen throughout this year, Gold prices have popped-higher as the Federal Reserve has talked up ‘looser for longer,’ and have then moved in reverse as the bank talks up the prospect of rate hikes. We’re in one of those negative cycles for Gold at the moment, and traders would likely want to avoid fighting that trend.
Gold Prices in a ‘Negative Cycle,’ similar to May of 2016
Chart prepared by James Stanley
This creates an uncomfortable situation for traders: To get on the side of near-term momentum, traders would need to go against the grain of the longer-term bullish move. And on the other side of that coin, buying here would expose the trader to even more losses until that near-term momentum might change.
For traders looking to get long in the direction of the ‘bigger picture’ move, they’d likely want to exercise a bit of caution here after the outsized counter-trend move. Traders could look for a ‘higher low’ to print above the prior swing-low of $1,200. This is an interesting level for a few reasons, as this was the May swing low while also being the 38.2% Fibonacci retracement of the 40-year move in Gold prices. Should support develop north of this prior low, traders could continue to investigate bullish positions in Gold in anticipation that the Fed might back down from their hawkishness, much as we’ve seen throughout 2016.
Last Bearish Cycle Set Support at $1,200
Chart prepared by James Stanley
For traders looking to trade the near-term bearish momentum, this could be a bumpy ride. We’ve seen two days of resistance (Friday and today) around the prior swing-low of $1,265; but we’ve also seen a rather vigorous bounce since Friday afternoon’s low at $1,241. Gold prices are likely a bit oversold at the moment after that panic-like move from last week; and the big question is whether follow-thru data and commentary might bring enough ammunition to further the move lower. If this isn’t the case, we’re likely going to be looking at some form of ‘range-bound’ like, choppy conditions in Gold markets until the next ‘major’ driver presents itself, which could be around US elections now just a month away.
--- Written by James Stanley, Analyst for DailyFX.com
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