Sive Morten
Special Consultant to the FPA
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Fundamentals
(Reuters) - Gold prices were little changed on Friday as a strong dollar limited gains, but the precious metal notched its first weekly rise in four as seasonal demand from Asia kicked in. Demand from Asia, including China, India and exchange-traded funds (ETF), has helped prop up prices this week.
Spot gold was up 0.1 percent at $1,267.23 an ounce by 2:57 p.m. EDT (1857 GMT). For the week, prices rose 1.4 percent, clawing back part of the 6.6 percent shed over the last three weeks. U.S. gold futures ended the session up 0.02 percent at $1,267.70.
Demand from India is expected to remain elevated as festivals, including Dhanteras and Diwali, will be celebrated at the end of the month - two of the most important Hindu festivals and a time when gold is traditionally given as a gift, Commerzbank analysts said.
However, the dollar index, which measures the greenback against a basket of currencies, was up 0.4 percent at 98.734 after touching its highest since February on Friday. Bullion has been hurt in recent weeks by the strength of the dollar, which has been helped by a slew of data indicating an improvement in the U.S. economy that could justify an interest rate rise later this year.
Higher U.S. interest rates increase the opportunity cost of holding non-yielding assets such as bullion and create a flight to investments that may offer higher returns. "The market right now, and for the rest of the year, is still focused on the U.S. interest rate hike. We mostly know it's likely to happen but we are looking at the economic signals ahead of it," Natixis precious metals analyst Bernard Dahdah said.
Holdings of the SPDR Gold Trust, the world's largest gold-backed ETF, rose 0.31 percent to 970.18 tonnes on Thursday. SPDR holdings have risen 2.3 percent so far this month.
MKS PAMP Group said in a note that ETF inflows continued to support gold. "However, dollar strength is likely to weigh upon moves higher over the short term amid euro and pound weakness." The euro hit a seven-month low against the dollar after the European Central Bank poured water on a tapering of its asset-buying program, keeping the door open for more stimulus this year.
COT Report
CFTC data shows normal behavior when net speculative position reaches extreme levels. We've started to talk about in summer and said that gold has very limited upside potential and no real bull trend could start until gold will free some space for more purchases. This has led us to conclusion that before real bull trend continuation we should get some retracement. Now it stands under way.
Speculative net long position level returns back to normal range as a lot of longs were closed in recent month. Position still stands at high levels, but they are not extreme already. Mostly net position is dropping due closing of longs rather than new shorts opening, as open interest is dropping as well. This also stands in a row with our expectations, recall our talks on closing of financial year, profit taking and managers' bonuses.
That's being said, COT report shows moderate bearish sentiment. This data lets gold to drop more, but at the same time it shows that theoretically gold has chances to go up again, since pressure of extreme long position now has become weaker. In fact COT report has done it's job - numbers have warned us 2 months ago on possible drop, this drop has happened and now data that we have today has no such an importancy as it was previously. Technical analysis again comes on first stage.
Technicals
Monthly
As COT report mostly has completed its role and predicted first drop, now we again should pay more attention to technical picture, to estimate destination point of current bearish action on long-term analysis.
Monthly picture currently supports our suggestion on deep retracement, this is just how markets work. Sooner or later but this retracement should have happened and now it stands underway.
Technically recent upward action started in Dec 2015 is first one after long term of decreasing and it should be interrupted by deep retracement sometime. Probably it should happen but this potential downward action has a great chance to become just a retracement. Overall political and financial situation in the world probably will not give a chance to relax. Thus, we have a positive long-term view on gold market.
As market slightly has moved above YPR1 and our K-resistance area, something is starting to form here, I mean pattern by which long-term global trend could change on gold. Price has formed nice bearish engulfing right around this area and now gold is following to its signal
Take a careful look at the picture - could you recognize here possible reverse H&S pattern? Besides the shape itself, some features here that in general typical for H&S. For example, relation between head and shoulders - 1.618. Butterfly... very often first part of H&S takes the shape of butterfly pattern...
Finally take a look at action on downward slope and upward one of the head - last move down was slower than current move up. All these moments point on possible H&S pattern here.
If we really will get it - then we could make an assumption on possible depth of retracement. Now the bottom of shoulder stands approximately around 1160 area... Currently we could only gamble what event could push gold as low as 1160 again, but probably something will happen.
Our suggestion on initial drop was correct - growing psychological pressure among managers of Hedge and Mutual funds, good performance of gold in 2016, coming rate hike in Dec and overloading long positions forced traders to fix profit as soon as gold has dropped below 1300 area.
That's being said, taking together technical, fundamental and sentiment picture we suggest further drop on gold, at least to 1160-1180 area. Second step is watch for validity of H&S pattern. If it really will work (and we think that it should), then we expect new long-term bullish trend on gold market that should lead to new highs on 2000$+ levels. It means that 1160-1200 area should be treated as strategical point for long entry.
Weekly
On weekly chart market starts to show upside reaction on reached support area. As we've mentioned previously, on weekly chart we have two different scenarios. In short-term scenario we expect that some upward bounce should happen, at least if market is not dispeared totally. That is what already has started. Major reason - weekly oversold at K-support area. This is rather nice stimulus for upward bounce. Actually we have DiNapoli bullish "Stretch" pattern.
Second scenario - is a reversal bearish pattern. Here, guys, we could get H&S. Head stands precisely at 1.618 extension of potential left shoulder. So, we think that this is one of the patterns that we have to keep in mind. To be formed, market needs continue dropping (after minor bounce) somewhere to 1200 area and then start to form right shoulder. Target of this direct H&S, as AB=CD pattern leads us directly to the bottom of right shoulder on monthly chart... Overall, this combination looks really interesting.
But first - upward bounce. This situtation leads us to conclusion - do not take short position yet. Trading long is possible but more risky as you will go against major tendency, dealing with the "Stretch" pattern. We do not recomment to go long. But if you will decide to do this - try to get more confirmation, some bullish patterns on your back, use nearest targets etc...
Weekly picture shows that probable upside destination should be an area around 1290 level:
Daily
The same 1290 level is confirmed by daily chart. Here we work with DRPO "Buy" pattern. Last week it has been confirmed and gold has started upward action. Currently this action is not too fast, but we also can't say something bad about it. Gold hasn't done anything yet that could put the shadow on perspectives of reaching 1290 area.
On daily chart 1290 is DRPO "Buy" target, daily K-resistance and former consolidation border that gold could re-test. This is normal retracement level. Trend has turned bullish here, gold is not at OB/OS level on daily chart.
Intraday
Since we've estimated our major pattern on daily chart, here, we need to control how intraday action corresponds to nature of daily pattern. On 4-hour chart I like that recent retracement was small and gold just re-tested top of daily high wave pattern. The thing that I do not like is too slow upward development. Upward action has no signs of thrust. This fact tells that we should cautionly choose upside target. Currently, it seems that market could reach 1285 area - K-resistance, at least we have patterns that point on this area. But whether it will climb there is still a question...
If indeed market will finalize upward retracement with butterfly - this will be perfect combination.
Read carefully!
Conclusion:
Perspective of 1-3 months looks bearish. We mostly are watching for reverse H&S pattern on monthly chart that should provide us strategical entry point around 1160-1200 level.
Perspective of 1-2 years looks bullish. As H&S pattern will be completed, new bullish trend should start. We expect to see gold on areas above 2000$
In very short-term perspective we will be watching for upside bounce to 1285-1292 area, but we will not trade it, although this is not forbidden for scalp traders. It's major purpose - is to give us level for short entry. As minor bounce will be completed, we expect next stage of bearish action to 1200 area.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) - Gold prices were little changed on Friday as a strong dollar limited gains, but the precious metal notched its first weekly rise in four as seasonal demand from Asia kicked in. Demand from Asia, including China, India and exchange-traded funds (ETF), has helped prop up prices this week.
Spot gold was up 0.1 percent at $1,267.23 an ounce by 2:57 p.m. EDT (1857 GMT). For the week, prices rose 1.4 percent, clawing back part of the 6.6 percent shed over the last three weeks. U.S. gold futures ended the session up 0.02 percent at $1,267.70.
Demand from India is expected to remain elevated as festivals, including Dhanteras and Diwali, will be celebrated at the end of the month - two of the most important Hindu festivals and a time when gold is traditionally given as a gift, Commerzbank analysts said.
However, the dollar index, which measures the greenback against a basket of currencies, was up 0.4 percent at 98.734 after touching its highest since February on Friday. Bullion has been hurt in recent weeks by the strength of the dollar, which has been helped by a slew of data indicating an improvement in the U.S. economy that could justify an interest rate rise later this year.
Higher U.S. interest rates increase the opportunity cost of holding non-yielding assets such as bullion and create a flight to investments that may offer higher returns. "The market right now, and for the rest of the year, is still focused on the U.S. interest rate hike. We mostly know it's likely to happen but we are looking at the economic signals ahead of it," Natixis precious metals analyst Bernard Dahdah said.
Holdings of the SPDR Gold Trust, the world's largest gold-backed ETF, rose 0.31 percent to 970.18 tonnes on Thursday. SPDR holdings have risen 2.3 percent so far this month.
MKS PAMP Group said in a note that ETF inflows continued to support gold. "However, dollar strength is likely to weigh upon moves higher over the short term amid euro and pound weakness." The euro hit a seven-month low against the dollar after the European Central Bank poured water on a tapering of its asset-buying program, keeping the door open for more stimulus this year.
COT Report
CFTC data shows normal behavior when net speculative position reaches extreme levels. We've started to talk about in summer and said that gold has very limited upside potential and no real bull trend could start until gold will free some space for more purchases. This has led us to conclusion that before real bull trend continuation we should get some retracement. Now it stands under way.
Speculative net long position level returns back to normal range as a lot of longs were closed in recent month. Position still stands at high levels, but they are not extreme already. Mostly net position is dropping due closing of longs rather than new shorts opening, as open interest is dropping as well. This also stands in a row with our expectations, recall our talks on closing of financial year, profit taking and managers' bonuses.
That's being said, COT report shows moderate bearish sentiment. This data lets gold to drop more, but at the same time it shows that theoretically gold has chances to go up again, since pressure of extreme long position now has become weaker. In fact COT report has done it's job - numbers have warned us 2 months ago on possible drop, this drop has happened and now data that we have today has no such an importancy as it was previously. Technical analysis again comes on first stage.
Technicals
Monthly
As COT report mostly has completed its role and predicted first drop, now we again should pay more attention to technical picture, to estimate destination point of current bearish action on long-term analysis.
Monthly picture currently supports our suggestion on deep retracement, this is just how markets work. Sooner or later but this retracement should have happened and now it stands underway.
Technically recent upward action started in Dec 2015 is first one after long term of decreasing and it should be interrupted by deep retracement sometime. Probably it should happen but this potential downward action has a great chance to become just a retracement. Overall political and financial situation in the world probably will not give a chance to relax. Thus, we have a positive long-term view on gold market.
As market slightly has moved above YPR1 and our K-resistance area, something is starting to form here, I mean pattern by which long-term global trend could change on gold. Price has formed nice bearish engulfing right around this area and now gold is following to its signal
Take a careful look at the picture - could you recognize here possible reverse H&S pattern? Besides the shape itself, some features here that in general typical for H&S. For example, relation between head and shoulders - 1.618. Butterfly... very often first part of H&S takes the shape of butterfly pattern...
Finally take a look at action on downward slope and upward one of the head - last move down was slower than current move up. All these moments point on possible H&S pattern here.
If we really will get it - then we could make an assumption on possible depth of retracement. Now the bottom of shoulder stands approximately around 1160 area... Currently we could only gamble what event could push gold as low as 1160 again, but probably something will happen.
Our suggestion on initial drop was correct - growing psychological pressure among managers of Hedge and Mutual funds, good performance of gold in 2016, coming rate hike in Dec and overloading long positions forced traders to fix profit as soon as gold has dropped below 1300 area.
That's being said, taking together technical, fundamental and sentiment picture we suggest further drop on gold, at least to 1160-1180 area. Second step is watch for validity of H&S pattern. If it really will work (and we think that it should), then we expect new long-term bullish trend on gold market that should lead to new highs on 2000$+ levels. It means that 1160-1200 area should be treated as strategical point for long entry.
Weekly
On weekly chart market starts to show upside reaction on reached support area. As we've mentioned previously, on weekly chart we have two different scenarios. In short-term scenario we expect that some upward bounce should happen, at least if market is not dispeared totally. That is what already has started. Major reason - weekly oversold at K-support area. This is rather nice stimulus for upward bounce. Actually we have DiNapoli bullish "Stretch" pattern.
Second scenario - is a reversal bearish pattern. Here, guys, we could get H&S. Head stands precisely at 1.618 extension of potential left shoulder. So, we think that this is one of the patterns that we have to keep in mind. To be formed, market needs continue dropping (after minor bounce) somewhere to 1200 area and then start to form right shoulder. Target of this direct H&S, as AB=CD pattern leads us directly to the bottom of right shoulder on monthly chart... Overall, this combination looks really interesting.
But first - upward bounce. This situtation leads us to conclusion - do not take short position yet. Trading long is possible but more risky as you will go against major tendency, dealing with the "Stretch" pattern. We do not recomment to go long. But if you will decide to do this - try to get more confirmation, some bullish patterns on your back, use nearest targets etc...
Weekly picture shows that probable upside destination should be an area around 1290 level:
Daily
The same 1290 level is confirmed by daily chart. Here we work with DRPO "Buy" pattern. Last week it has been confirmed and gold has started upward action. Currently this action is not too fast, but we also can't say something bad about it. Gold hasn't done anything yet that could put the shadow on perspectives of reaching 1290 area.
On daily chart 1290 is DRPO "Buy" target, daily K-resistance and former consolidation border that gold could re-test. This is normal retracement level. Trend has turned bullish here, gold is not at OB/OS level on daily chart.
Intraday
Since we've estimated our major pattern on daily chart, here, we need to control how intraday action corresponds to nature of daily pattern. On 4-hour chart I like that recent retracement was small and gold just re-tested top of daily high wave pattern. The thing that I do not like is too slow upward development. Upward action has no signs of thrust. This fact tells that we should cautionly choose upside target. Currently, it seems that market could reach 1285 area - K-resistance, at least we have patterns that point on this area. But whether it will climb there is still a question...
If indeed market will finalize upward retracement with butterfly - this will be perfect combination.
Read carefully!
Conclusion:
Perspective of 1-3 months looks bearish. We mostly are watching for reverse H&S pattern on monthly chart that should provide us strategical entry point around 1160-1200 level.
Perspective of 1-2 years looks bullish. As H&S pattern will be completed, new bullish trend should start. We expect to see gold on areas above 2000$
In very short-term perspective we will be watching for upside bounce to 1285-1292 area, but we will not trade it, although this is not forbidden for scalp traders. It's major purpose - is to give us level for short entry. As minor bounce will be completed, we expect next stage of bearish action to 1200 area.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
