Sive Morten
Special Consultant to the FPA
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Fundamentals
Situation on gold market has calmed down a bit, but overall bearish long-term sentiment still holds, despite all attempts to show upward bounce. Currently gold price is a function of inflation and US economy condition. While inflation is anemic and no signs of its increasing yet and US economy shows sign of improving – gold market will be under pressure. If we surplus bearish seasonal trend then the chances that we will some drastical changes here in nearest perspective almost equal to zero.
What we’ve got on previous week:
On Friday U.S. data has shown low inflation and improving consumer confidence. This has pressed on gold and dampened investor interest. As a result gold has decreased around 2% and May has become second consecutive month of decreasing. Data showing a six-year high in consumer sentiment weighed on gold, a traditional safe haven. Combining this new data with speech of Fed on previous week and hints on potential contraction of QE III, plunge in US Treasuries yields just reinforce unfavorable atmosphere for gold perspectives.
Technically a combination of decreasing fund interest, option expiration and squaring of books after investors covered short positions also sent open interest in U.S. gold futures to its lowest in almost four years, traders said. CFTC report shows huge drop in open interest when speculative net long position has made shy attempt to increase. This is very typical for bear market and open interest supports overall bearish sentiment here – decreases when market and speculative net position goes up and increasing when bear trend re-establishes:
Although Gold had gained more than 3 percent in the prior three sessions as discouraging U.S. growth data and jobless claims figures boosted hopes for continued Federal Reserve stimulus. But for the month of May, gold dropped 5.8 percent following April's decline of more than 7 percent. On Thursday, CME data showed Comex gold futures' open interest inched up less than 1 percent to 385,901 contracts, hovering near its lowest level since September 2009. The market gauge was 13 percent lower versus 445,517 lots last Thursday. Economic optimism and growing investor interest in better-performing assets such as equities explained declining interest in the safe-haven metal, traders said.
Holdings in the SPDR Gold Trust the world's largest gold-backed exchange-traded fund, remained unchanged at 1,013.15 tonnes on Thursday, after rising for the first time in three weeks on Wednesday. But these are still near four-year lows, having lost nearly 337 tonnes in 2013 so far.
Many investors appeal to physical demand in Asia and India region, and dealers said interest in physical buying stayed higher after a mid-April sell off sent the precious metal to two-year lows. According to Reuters news India’s gold demand in the second half of 2013 will be as strong as last year despite a jump in purchases in the first half, due to prospects of good monsoon rains that lift farmers' income, the key buyers, the World Gold Council CEO said on Friday. Still, we should not probably overvalue this demand and be fascinating with this, mostly because supply/demand on physical gold is stable for most recent 5+ years and equal each other. It means that most part of physical gold produced based on preliminary contracts. Besides, increasing of demand due year-by-year Indian wedding period already was included in seasonal gold trend. Thus, bullish phase of cycle usually starts at the end of August. I have studied real demand and supply by major consumers of physical gold and come to conclusion that gold market is mostly driven by changes in economy sentiment and inflation rather than real yearly demand for gold in different spheres – jewelry, industrial production, central banks purchases, dentistry and some others.
Here are the charts of SPDR Holdings, Open Interest and Price:
Monthly
As May candle has closed now can really take a look at possibility of Volatility Breakout (VOB) pattern, that we have discussed previously. This pattern usually provides solid reliability, since it based not on some price averaging as other indicators but on statistical measure of standard deviation, i.e. on volatility. This is in fact the core of the market’s breath and if we can call it in this way – some statistical law that could lead to significant consequences.
Now we have VOB setup here. Market never was as oversold as it stands now. Take a look at DOSC indicator again – market now stands at all time extreme point that is lower than the previous extreme value in 2008. This gives us very significant conclusion that will be hard to overvalue. Usually when market forms VOB it leads to 2-leg downward move in some shape of AB-CD, but not necessary that AB should be equal to CD. The minimum target of VOB is 0.618 extension of AB-CD, where AB – initial swing down that has given VOB. Other words – now market is forming AB move. Then some retracement up should follow and then downward continuation, i.e. extension.
So two significant conclusions could be made here: whatever bounce market will show here – this probably will be just retracement but not a reversal. Second – market probably will reach some deeper support level and closest one stands around 1200.
Weekly
On weekly time frame you can see impact of oversold on monthly. Once we’ve said that if you even take short position on weekly – do not point the target below previous lows, since market extremely oversold. Thus, we can see here that price can’t move lower and stand in the range of April sell-off.
Very often such significant moves, as we’ve got on April forces market to stand in its range for some time. It looks like market accommodates for new range, trying to understand what is going on. Here we have particularly this case. Six weeks in a row market stands in the range of April sell-off. Past week action was not impressive and market mostly was indecision and has formed high wave candle. The most action should happen when market will pass through either upper border 1500 or lower one – 1320. But as we can see on monthly chart – gold can stand in consolidation rather long time. Besides, price hardly will easily pass through 1320 due oversold, as I said. There is only one way how it could happen. Fundamental factors that hunt gold in extreme oversold conditions – the same factors could continue to dominate over technical moments, but it is very difficult to predict. Currently it looks their impact gradually becomes lighter. So, most probable some kind of range behavior, at least within nearest 2-3 months due summer time and bearish seasonal trend. Thus, we can try to search possibility for long entry around 1320 with some short-term targets and search for short somewhere around 1500, but currently I have significant doubts that market will be able to reach it.
Daily
Here we see degradation of upward action. Initially price has shown nice looking bounce but in recent 2 weeks price action was very sloppy and choppy. This looks like retracement and is not natural for Double Bottom pattern where we usually see fast move up. This moment does not allow us to count on appearing of Double bottom. Bullish trend is not supported by price action, that is more looking flat rather that upward. Another significant moment – price stands very close to daily overbought and has created bearish engulfing pattern right at 50% resistance level.
Thus, having bearish pattern, anemic and sloppy upward action – it is very difficult to make bet on upward continuation, at least until market will not vanish bearish pattern. Conversely, trying to take short position will be very suitable, since pattern gives us nice and clear setups for stop placement. The major risk here is 0.618 extension of large and wide AB=CD pattern that stands slightly above current pattern – whether market will hit it or not is very difficult to say definitely, especially because currently this target stands beyond overbought. But since we have engulfing pattern – let’s focus on it.
4-hour
Here is only one moment that I would like to comment. On Friday we’ve said, that market could show retracement down, but it has to hold above broken 1400 resistance to keep bullish context valid. That has not happened – market has returned as right back below 1400 line as broken through even deeper support. Currently it looks like “bullish trap” - failure breakout of triangle consolidation. It looks bearish.
1-hour
Hourly chart makes our life easier. In fact we have perfect context for directional trade – as scalpers as positional traders will find setups for trading. As usual we can get either DRPO “Sell” or B&B “Buy” and both of them could be used for trading in both directions. Since our context on daily is bearish and we have bearish engulfing pattern – this swing down infact is the swing of this pattern itself. So we can be focused purely on it. So, if this will be DRPO – scalpers can take scalp longs. In this case we can count on deeper retracement up and most probable destination – June MPP, that has not been tested and stands around 1405. Consequently, positional traders should keep an eye on this level for possible short entry opportunity. If this will be B&B “Sell”, then most probable level to watch is an area between MPP and K-resistance, that stands by the way - again around 1400. Target will be again around 1320 lows.
Conclusion:
Technically and fundamentally gold market stands in long-term bearish motion, but extreme oversold level on monthly time frame puts limitations on positions and targets that we can get on lower time frames. That’s why currently it is very dangerous trying to keep shorts significantly below current lows around 1320. By May close we’ve got VOB pattern that gives us forecast for long-term price behavior and promise compounded downward move in shape of some AB-CD.
On short-term charts market shows invalidity of bullish ambitions and looks heavy. Appearing of clear bearish patterns on daily and hourly charts let us significantly reduce our trading range and be focused on small swings that give us nice opportunities for trading.
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.
Situation on gold market has calmed down a bit, but overall bearish long-term sentiment still holds, despite all attempts to show upward bounce. Currently gold price is a function of inflation and US economy condition. While inflation is anemic and no signs of its increasing yet and US economy shows sign of improving – gold market will be under pressure. If we surplus bearish seasonal trend then the chances that we will some drastical changes here in nearest perspective almost equal to zero.
What we’ve got on previous week:
On Friday U.S. data has shown low inflation and improving consumer confidence. This has pressed on gold and dampened investor interest. As a result gold has decreased around 2% and May has become second consecutive month of decreasing. Data showing a six-year high in consumer sentiment weighed on gold, a traditional safe haven. Combining this new data with speech of Fed on previous week and hints on potential contraction of QE III, plunge in US Treasuries yields just reinforce unfavorable atmosphere for gold perspectives.
Technically a combination of decreasing fund interest, option expiration and squaring of books after investors covered short positions also sent open interest in U.S. gold futures to its lowest in almost four years, traders said. CFTC report shows huge drop in open interest when speculative net long position has made shy attempt to increase. This is very typical for bear market and open interest supports overall bearish sentiment here – decreases when market and speculative net position goes up and increasing when bear trend re-establishes:
Although Gold had gained more than 3 percent in the prior three sessions as discouraging U.S. growth data and jobless claims figures boosted hopes for continued Federal Reserve stimulus. But for the month of May, gold dropped 5.8 percent following April's decline of more than 7 percent. On Thursday, CME data showed Comex gold futures' open interest inched up less than 1 percent to 385,901 contracts, hovering near its lowest level since September 2009. The market gauge was 13 percent lower versus 445,517 lots last Thursday. Economic optimism and growing investor interest in better-performing assets such as equities explained declining interest in the safe-haven metal, traders said.
Holdings in the SPDR Gold Trust the world's largest gold-backed exchange-traded fund, remained unchanged at 1,013.15 tonnes on Thursday, after rising for the first time in three weeks on Wednesday. But these are still near four-year lows, having lost nearly 337 tonnes in 2013 so far.
Many investors appeal to physical demand in Asia and India region, and dealers said interest in physical buying stayed higher after a mid-April sell off sent the precious metal to two-year lows. According to Reuters news India’s gold demand in the second half of 2013 will be as strong as last year despite a jump in purchases in the first half, due to prospects of good monsoon rains that lift farmers' income, the key buyers, the World Gold Council CEO said on Friday. Still, we should not probably overvalue this demand and be fascinating with this, mostly because supply/demand on physical gold is stable for most recent 5+ years and equal each other. It means that most part of physical gold produced based on preliminary contracts. Besides, increasing of demand due year-by-year Indian wedding period already was included in seasonal gold trend. Thus, bullish phase of cycle usually starts at the end of August. I have studied real demand and supply by major consumers of physical gold and come to conclusion that gold market is mostly driven by changes in economy sentiment and inflation rather than real yearly demand for gold in different spheres – jewelry, industrial production, central banks purchases, dentistry and some others.
Here are the charts of SPDR Holdings, Open Interest and Price:
Monthly
As May candle has closed now can really take a look at possibility of Volatility Breakout (VOB) pattern, that we have discussed previously. This pattern usually provides solid reliability, since it based not on some price averaging as other indicators but on statistical measure of standard deviation, i.e. on volatility. This is in fact the core of the market’s breath and if we can call it in this way – some statistical law that could lead to significant consequences.
Now we have VOB setup here. Market never was as oversold as it stands now. Take a look at DOSC indicator again – market now stands at all time extreme point that is lower than the previous extreme value in 2008. This gives us very significant conclusion that will be hard to overvalue. Usually when market forms VOB it leads to 2-leg downward move in some shape of AB-CD, but not necessary that AB should be equal to CD. The minimum target of VOB is 0.618 extension of AB-CD, where AB – initial swing down that has given VOB. Other words – now market is forming AB move. Then some retracement up should follow and then downward continuation, i.e. extension.
So two significant conclusions could be made here: whatever bounce market will show here – this probably will be just retracement but not a reversal. Second – market probably will reach some deeper support level and closest one stands around 1200.
Weekly
On weekly time frame you can see impact of oversold on monthly. Once we’ve said that if you even take short position on weekly – do not point the target below previous lows, since market extremely oversold. Thus, we can see here that price can’t move lower and stand in the range of April sell-off.
Very often such significant moves, as we’ve got on April forces market to stand in its range for some time. It looks like market accommodates for new range, trying to understand what is going on. Here we have particularly this case. Six weeks in a row market stands in the range of April sell-off. Past week action was not impressive and market mostly was indecision and has formed high wave candle. The most action should happen when market will pass through either upper border 1500 or lower one – 1320. But as we can see on monthly chart – gold can stand in consolidation rather long time. Besides, price hardly will easily pass through 1320 due oversold, as I said. There is only one way how it could happen. Fundamental factors that hunt gold in extreme oversold conditions – the same factors could continue to dominate over technical moments, but it is very difficult to predict. Currently it looks their impact gradually becomes lighter. So, most probable some kind of range behavior, at least within nearest 2-3 months due summer time and bearish seasonal trend. Thus, we can try to search possibility for long entry around 1320 with some short-term targets and search for short somewhere around 1500, but currently I have significant doubts that market will be able to reach it.
Daily
Here we see degradation of upward action. Initially price has shown nice looking bounce but in recent 2 weeks price action was very sloppy and choppy. This looks like retracement and is not natural for Double Bottom pattern where we usually see fast move up. This moment does not allow us to count on appearing of Double bottom. Bullish trend is not supported by price action, that is more looking flat rather that upward. Another significant moment – price stands very close to daily overbought and has created bearish engulfing pattern right at 50% resistance level.
Thus, having bearish pattern, anemic and sloppy upward action – it is very difficult to make bet on upward continuation, at least until market will not vanish bearish pattern. Conversely, trying to take short position will be very suitable, since pattern gives us nice and clear setups for stop placement. The major risk here is 0.618 extension of large and wide AB=CD pattern that stands slightly above current pattern – whether market will hit it or not is very difficult to say definitely, especially because currently this target stands beyond overbought. But since we have engulfing pattern – let’s focus on it.
4-hour
Here is only one moment that I would like to comment. On Friday we’ve said, that market could show retracement down, but it has to hold above broken 1400 resistance to keep bullish context valid. That has not happened – market has returned as right back below 1400 line as broken through even deeper support. Currently it looks like “bullish trap” - failure breakout of triangle consolidation. It looks bearish.
1-hour
Hourly chart makes our life easier. In fact we have perfect context for directional trade – as scalpers as positional traders will find setups for trading. As usual we can get either DRPO “Sell” or B&B “Buy” and both of them could be used for trading in both directions. Since our context on daily is bearish and we have bearish engulfing pattern – this swing down infact is the swing of this pattern itself. So we can be focused purely on it. So, if this will be DRPO – scalpers can take scalp longs. In this case we can count on deeper retracement up and most probable destination – June MPP, that has not been tested and stands around 1405. Consequently, positional traders should keep an eye on this level for possible short entry opportunity. If this will be B&B “Sell”, then most probable level to watch is an area between MPP and K-resistance, that stands by the way - again around 1400. Target will be again around 1320 lows.
Conclusion:
Technically and fundamentally gold market stands in long-term bearish motion, but extreme oversold level on monthly time frame puts limitations on positions and targets that we can get on lower time frames. That’s why currently it is very dangerous trying to keep shorts significantly below current lows around 1320. By May close we’ve got VOB pattern that gives us forecast for long-term price behavior and promise compounded downward move in shape of some AB-CD.
On short-term charts market shows invalidity of bullish ambitions and looks heavy. Appearing of clear bearish patterns on daily and hourly charts let us significantly reduce our trading range and be focused on small swings that give us nice opportunities for trading.
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.
