Sive Morten
Special Consultant to the FPA
- Messages
- 18,648
Fundamentals
This week was good for gold market. Despite flat action at the end of the week, dynamic was positive, which supports idea of our weekly DRPO "Buy" setup and 1260 target. Major driving factors were some dollar weakness, turmoil around Brexit and weakness of stock market across the board.
As Reuters reports - gold prices edged up on Friday and were on course for a third straight week of gains, supported by robust technical momentum and a softer dollar.
“The technical posture of gold in near term basis has improved remarkably in the past two weeks,” said Kitco Metals senior analyst Jim Wyckoff, adding that the volatility seen in the stocks markets worldwide recently has also been favoring the bullion.
A recent sell-off in global stocks had prompted investors to seek refuge in gold, pushing prices of the bullion to a 2-1/2-month high, at $1,233.26 earlier this week.
However, equity markets recovered on Friday, capping gains in the bullion.
Also supporting gold was a slightly weaker dollar, said David Meger, director of metals trading at High Ridge Futures.
“We have seen a bit of a pick up in safe haven buying over the last couple of weeks based on the concerns we see in economy and equity markets weakening,” Meger said.
On the technical front, a rise above the 100-day moving average, around $1,225, was also supporting gold, with some analysts saying a clear break above that level could trigger further gains and put further pressure on short-sellers.
Further resistance for gold stood at about $1,236.90 an ounce and then at $1,240.00, Wyckoff said in a note.
Indicative of an improvement in investor sentiment, holdings of the SPDR Gold Trust, the largest gold-backed ETF, have gained 2.5 percent in the past two weeks.
Speaking on relation between gold and stock market - it is becoming tighter as more problems are seen on stock market. Classical theory of stock market reversal suggests that stock market reverses down when real rate of return in economy equals to stock market historical yield. With 10-year yield around 3.2% right now, there is just 1-1.5% gap in yield with stock market. Expectation of further rate increase for another 1% leads us precisely to equilibrium point. So, first signs of weakness that we've mentioned in the beginning of the year, now become brighter and 3+% collapse on stock market appears regularly these days. This is first signs that big whales soon will rob population and big sell-off somewhere near the corner, I suppose. As in 2008, this will support gold prices.
COT Report
Recent CFTC data shows positive numbers for our setup. Hedgers significantly increase short positions, while speculators have closed big part of shorts and open longs as well. In dry result - gold has turned net bullish on a background of open interest growth:
Source: CFTC.gov
Charting by Investing.com
Here is numbers:
SPDR Fund statistics also supports turn around in sentiment:
Speaking on relation between gold and stock market - the major question is not about reversal per se, whether it will happen or not, but when it will happen.
Fathom consulting in recent report, suggests that stock market still has some time, and, although 3+% daily collapses could start appearing oftener, in general it should hold flat action by far...
Even within the relative benign market experience of the last three years, last week’s sell-off did not particularly stand out. It has, however, validated a pattern consistent with the inherent instability between late-cycle macroeconomic fundamentals and richly priced risky assets. This has further vindicated Fathom’s preference for running lower levels of risk across its asset allocation recommendations since the beginning of the year.
However, last week’s market action brought out some other interesting dynamics. In particular, the sell-off seemed motivated less by expensive valuations and more by uncertainties around the fundamental macroeconomic backdrop.
So, as a dry result - bullish sentiment on gold market and more nervousness of stock markets, coupled with political issues create positive background for gold performance and corresponds our technical picture.
Technical
Monthly
On monthly chart we keep our long-term technical scenario, that could be realized. this is not single possible scenario, but currently it seems as very probable. We will keep it intact for awhile, because it illustrates our fundamental expectations on gold market. Although final downside target could be revised higher someday because as political as economical situation is not static but we keep our direction "down" by far.
Here we try to involve fundamental view in technical analysis, trying to combine patterns with real fundamental situation on gold. So, we will take broader view.
If you follow our weekly updates, you should remember our explanation and why we think that gold inability to break through 1380 resistance should be treated as bulls' defeat and gold failure. This is important in outlook of longer-term perspective.
Fundamental picture suggests two major things. In shorter-term US will keep dominate role in the world, because indirectly it controls EU economy as major EU companies have significant part of their business in US, or on US territory, US dollar is still world major currency and, as we've estimated above, China starts to show signs of chilling their economy. US economy itself feels good. D. Trump by restructuring of political role of US on international arena will safe a lot of "unnecessary" spending, such different programs of opposition financing, military spending of different kind. This should improve US budget, reduce deficit, which also will work on support of US economy.
Second important issue, this long-term relations that stand for decades start changing. Both of these moments, putting together, lead us to following conclusion. Within few years, 2-3 probably gold will remain under pressure of positive interest rates cycle. While gradually, when breaking of long-term economic relations will be seen brighter and brighter and impact not only China, EU but US as well - this will be turning point for the gold, or slightly before that. Because any global crush of any kind triggers demand for gold. That is what we see from fundamentals. The same view we see among other analysis, which they backed with statistics and fundamental research. Thus, Fathom Consulting expects starting of world crisis around 2020.
It could look unbelievable, but technical picture shows approximately the same. Failure of 1380 upside breakout confirms our idea of 2-3 years of US and US Dollar domination. But at the same time gold should show preparation to reversal, and here it is. One of the scenarios that might be formed here is big 1.618 butterfly, which is bullish reversal pattern. It has 1.618 target right around gold price, which is corresponds to extraction spending approximately. So, it is long-term breakeven point.
Finally, butterfly could become large reverse H&S pattern around all time 5/8 Fib support and ~40% of this pattern could be seen on the market. What we see on the chart nicely corresponds to current fundamental background. Alternative scenarios suggest appearing of different patterns, such as "222" Buy, or 1.27 butterfly but it doesn't affect the core and reflects only a degree of global political and economical processes, whether they will be smooth or drastic.
Of course, political life is not static, and it could show fast turns. But right now, everything looks very harmonic.
Here we also have mentioned huge demand on gold from emerging countries - China, Russia and Turkey. Developed countries repatriate gold from US. It means that everybody prepares to something, which should significantly increase demand for a gold. Decisive moment here will be the breakout of YPS1 where gold stands right now.
Weekly
So, on weekly chart we're looking for long-term pullback as a reaction on oversold. Despite our long term bearish trend on gold, it can't show straight down action without any pauses. And we think that one of these stops we have right now. Although the scale of this "pause" looks impressive 50-70$ per contract bounce, on weekly chart this is just 3/8 pullback, which seems normal when market hits oversold and YPS1 areas. Thus, on weekly we still watch for our directional pattern, based on the thrust down.
Last two weeks we've put detailed analysis of DRPO pattern here, with all nuances and pitfalls that could happen. Although it is not ideal by shape, but it's working. Rally that we have is more than welcome and supportive to DRPO pattern. It means that stops of traders on the "wrong" side were triggered. Now short-term bulls should step in, they just wait for pullback.
This week we see positive dynamic again, in a row with DRPO Setup. Yes, it would be nice, if price action was a bit stronger, but gradual action is not a flaw. Here, on weekly, we do not have any additional inputs. The common target of DRPO is 50% of its thrust, which stands at $1260. Still, 1238 level is also important, because market now shows pause right below it. That's being said - weekly chart keeps bullish context.
Daily
Last week brings some new inputs to daily picture. Although retracement that we've expected has started indeed, its depth is too small. Besides, now we have clear shape of pennant - which is traditionally continuation pattern. It makes me think that either this IS a retracement and we will not get anything else, or major pullback will start a bit later, when OP target will be hit. To be honest, guys, I'm gravitating to first scenario. Recall sentiment shifts and change in market positions on gold market. Strong new bullish money could hold retracement and keep it at minimal levels. Trend is bullish here, and I would suggest that we need to think about taking long position in the beginning of the week.
Next target here is XOP at 1267 which mostly corresponds to weekly DRPO target:
Intraday
Smaller time frames shows another reasons in favor of upside continuation, or spike, at least. Here is our 4H chart and expectation of H&S pattern. When H&S shifts to triangle and we also get signs of bullish dynamic pressure - this is bullish sign. It tells that previous top should be taking out - either as W&R or real upside breakout and continuation. Also we have bullish grabber here:
Here guys, we do not have the only way how position could be taken. But we need to watch for bullish reversal patterns. I would suggest that 1223-1225 is an area that we should keep an eye on. Market right now stands at K-support. Here, for example it could try to complete OP target by forming butterfly. But this is just one of the possible scenarios. I do not exclude chance that upside action will start right from here. So, just keep an eye on price action and act accordingly. The task is simple - get bullish position, until market stands in pennant consolidation.
The as the bottom line - gold market shows rare agreement of fundamental and economical factors which creates good foundation for short-term upside performance. It makes us to search good setups for long entry in the beginning of the week.
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.
This week was good for gold market. Despite flat action at the end of the week, dynamic was positive, which supports idea of our weekly DRPO "Buy" setup and 1260 target. Major driving factors were some dollar weakness, turmoil around Brexit and weakness of stock market across the board.
As Reuters reports - gold prices edged up on Friday and were on course for a third straight week of gains, supported by robust technical momentum and a softer dollar.
“The technical posture of gold in near term basis has improved remarkably in the past two weeks,” said Kitco Metals senior analyst Jim Wyckoff, adding that the volatility seen in the stocks markets worldwide recently has also been favoring the bullion.
A recent sell-off in global stocks had prompted investors to seek refuge in gold, pushing prices of the bullion to a 2-1/2-month high, at $1,233.26 earlier this week.
However, equity markets recovered on Friday, capping gains in the bullion.
Also supporting gold was a slightly weaker dollar, said David Meger, director of metals trading at High Ridge Futures.
“We have seen a bit of a pick up in safe haven buying over the last couple of weeks based on the concerns we see in economy and equity markets weakening,” Meger said.
On the technical front, a rise above the 100-day moving average, around $1,225, was also supporting gold, with some analysts saying a clear break above that level could trigger further gains and put further pressure on short-sellers.
Further resistance for gold stood at about $1,236.90 an ounce and then at $1,240.00, Wyckoff said in a note.
Indicative of an improvement in investor sentiment, holdings of the SPDR Gold Trust, the largest gold-backed ETF, have gained 2.5 percent in the past two weeks.
Speaking on relation between gold and stock market - it is becoming tighter as more problems are seen on stock market. Classical theory of stock market reversal suggests that stock market reverses down when real rate of return in economy equals to stock market historical yield. With 10-year yield around 3.2% right now, there is just 1-1.5% gap in yield with stock market. Expectation of further rate increase for another 1% leads us precisely to equilibrium point. So, first signs of weakness that we've mentioned in the beginning of the year, now become brighter and 3+% collapse on stock market appears regularly these days. This is first signs that big whales soon will rob population and big sell-off somewhere near the corner, I suppose. As in 2008, this will support gold prices.
COT Report
Recent CFTC data shows positive numbers for our setup. Hedgers significantly increase short positions, while speculators have closed big part of shorts and open longs as well. In dry result - gold has turned net bullish on a background of open interest growth:
Source: CFTC.gov
Charting by Investing.com
Here is numbers:
SPDR Fund statistics also supports turn around in sentiment:
Speaking on relation between gold and stock market - the major question is not about reversal per se, whether it will happen or not, but when it will happen.
Fathom consulting in recent report, suggests that stock market still has some time, and, although 3+% daily collapses could start appearing oftener, in general it should hold flat action by far...
Even within the relative benign market experience of the last three years, last week’s sell-off did not particularly stand out. It has, however, validated a pattern consistent with the inherent instability between late-cycle macroeconomic fundamentals and richly priced risky assets. This has further vindicated Fathom’s preference for running lower levels of risk across its asset allocation recommendations since the beginning of the year.
However, last week’s market action brought out some other interesting dynamics. In particular, the sell-off seemed motivated less by expensive valuations and more by uncertainties around the fundamental macroeconomic backdrop.
So, as a dry result - bullish sentiment on gold market and more nervousness of stock markets, coupled with political issues create positive background for gold performance and corresponds our technical picture.
Technical
Monthly
On monthly chart we keep our long-term technical scenario, that could be realized. this is not single possible scenario, but currently it seems as very probable. We will keep it intact for awhile, because it illustrates our fundamental expectations on gold market. Although final downside target could be revised higher someday because as political as economical situation is not static but we keep our direction "down" by far.
Here we try to involve fundamental view in technical analysis, trying to combine patterns with real fundamental situation on gold. So, we will take broader view.
If you follow our weekly updates, you should remember our explanation and why we think that gold inability to break through 1380 resistance should be treated as bulls' defeat and gold failure. This is important in outlook of longer-term perspective.
Fundamental picture suggests two major things. In shorter-term US will keep dominate role in the world, because indirectly it controls EU economy as major EU companies have significant part of their business in US, or on US territory, US dollar is still world major currency and, as we've estimated above, China starts to show signs of chilling their economy. US economy itself feels good. D. Trump by restructuring of political role of US on international arena will safe a lot of "unnecessary" spending, such different programs of opposition financing, military spending of different kind. This should improve US budget, reduce deficit, which also will work on support of US economy.
Second important issue, this long-term relations that stand for decades start changing. Both of these moments, putting together, lead us to following conclusion. Within few years, 2-3 probably gold will remain under pressure of positive interest rates cycle. While gradually, when breaking of long-term economic relations will be seen brighter and brighter and impact not only China, EU but US as well - this will be turning point for the gold, or slightly before that. Because any global crush of any kind triggers demand for gold. That is what we see from fundamentals. The same view we see among other analysis, which they backed with statistics and fundamental research. Thus, Fathom Consulting expects starting of world crisis around 2020.
It could look unbelievable, but technical picture shows approximately the same. Failure of 1380 upside breakout confirms our idea of 2-3 years of US and US Dollar domination. But at the same time gold should show preparation to reversal, and here it is. One of the scenarios that might be formed here is big 1.618 butterfly, which is bullish reversal pattern. It has 1.618 target right around gold price, which is corresponds to extraction spending approximately. So, it is long-term breakeven point.
Finally, butterfly could become large reverse H&S pattern around all time 5/8 Fib support and ~40% of this pattern could be seen on the market. What we see on the chart nicely corresponds to current fundamental background. Alternative scenarios suggest appearing of different patterns, such as "222" Buy, or 1.27 butterfly but it doesn't affect the core and reflects only a degree of global political and economical processes, whether they will be smooth or drastic.
Of course, political life is not static, and it could show fast turns. But right now, everything looks very harmonic.
Here we also have mentioned huge demand on gold from emerging countries - China, Russia and Turkey. Developed countries repatriate gold from US. It means that everybody prepares to something, which should significantly increase demand for a gold. Decisive moment here will be the breakout of YPS1 where gold stands right now.
Weekly
So, on weekly chart we're looking for long-term pullback as a reaction on oversold. Despite our long term bearish trend on gold, it can't show straight down action without any pauses. And we think that one of these stops we have right now. Although the scale of this "pause" looks impressive 50-70$ per contract bounce, on weekly chart this is just 3/8 pullback, which seems normal when market hits oversold and YPS1 areas. Thus, on weekly we still watch for our directional pattern, based on the thrust down.
Last two weeks we've put detailed analysis of DRPO pattern here, with all nuances and pitfalls that could happen. Although it is not ideal by shape, but it's working. Rally that we have is more than welcome and supportive to DRPO pattern. It means that stops of traders on the "wrong" side were triggered. Now short-term bulls should step in, they just wait for pullback.
This week we see positive dynamic again, in a row with DRPO Setup. Yes, it would be nice, if price action was a bit stronger, but gradual action is not a flaw. Here, on weekly, we do not have any additional inputs. The common target of DRPO is 50% of its thrust, which stands at $1260. Still, 1238 level is also important, because market now shows pause right below it. That's being said - weekly chart keeps bullish context.
Daily
Last week brings some new inputs to daily picture. Although retracement that we've expected has started indeed, its depth is too small. Besides, now we have clear shape of pennant - which is traditionally continuation pattern. It makes me think that either this IS a retracement and we will not get anything else, or major pullback will start a bit later, when OP target will be hit. To be honest, guys, I'm gravitating to first scenario. Recall sentiment shifts and change in market positions on gold market. Strong new bullish money could hold retracement and keep it at minimal levels. Trend is bullish here, and I would suggest that we need to think about taking long position in the beginning of the week.
Next target here is XOP at 1267 which mostly corresponds to weekly DRPO target:
Intraday
Smaller time frames shows another reasons in favor of upside continuation, or spike, at least. Here is our 4H chart and expectation of H&S pattern. When H&S shifts to triangle and we also get signs of bullish dynamic pressure - this is bullish sign. It tells that previous top should be taking out - either as W&R or real upside breakout and continuation. Also we have bullish grabber here:
Here guys, we do not have the only way how position could be taken. But we need to watch for bullish reversal patterns. I would suggest that 1223-1225 is an area that we should keep an eye on. Market right now stands at K-support. Here, for example it could try to complete OP target by forming butterfly. But this is just one of the possible scenarios. I do not exclude chance that upside action will start right from here. So, just keep an eye on price action and act accordingly. The task is simple - get bullish position, until market stands in pennant consolidation.
The as the bottom line - gold market shows rare agreement of fundamental and economical factors which creates good foundation for short-term upside performance. It makes us to search good setups for long entry in the beginning of the week.
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.
