Sive Morten
Special Consultant to the FPA
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Fundamentals
(Reuters) - Gold fell 1 percent on Friday and was on track for its biggest weekly loss in 2017 as speculation grew that the U.S. Federal Reserve would press ahead with a rate increase this month.
Fed Chair Janet Yellen said on Friday that the central bank is set to raise its benchmark interest rate later this month as long as economic data on jobs and inflation holds up.
Prior to Yellen's comments, the probability of a Fed move in March had already risen to nearly 80 percent, money markets indicated, after hawkish comments from New York Fed chief William Dudley and San Francisco Fed President John Williams.
"If there has been a conscious effort (to raise expectations for a rate hike) I'm about to join it," Fed Vice Chairman Stanley Fischer told an economists' forum, when asked about comments by other Fed officials this past week that have boosted market odds of a March rate hike.
Spot gold was down 0.03 percent at $1,234.41 an ounce by 2:22 p.m. EST (1922 GMT), after falling 1 percent to $1,222.51, the lowest since Feb. 15. U.S. gold futures for April delivery settled down 0.5 percent at $1,226.50.
Gold prices have retreated more than 2 percent after failing to decisively break through resistance at their 200-day moving on Monday.
"The market has responded very clearly to the more aggressive stance by FOMC members regarding rate hikes in March," Mitsubishi analyst Jonathan Butler said. "It's fair to say that a rate hike in March is pretty much priced into gold."
Gold is highly sensitive to rising U.S. interest rates as they increase the opportunity cost of holding non-yielding bullion, while boosting the dollar in which it is priced.
The world's largest gold-backed exchange-traded fund, SPDR Gold Shares , reported a second daily inflow on Thursday, of 1.8 tonnes, bringing the weekly rise to 4 tonnes. The dollar, however, took a breather after two days of gains on Friday.
COT Report
COT data shows clear bullish sentiment. Open interest is growing as well as net speculative long position. SPDR fund also reports on net inflow during last week. Both these moments do not support idea of downside reversal by far:
Technicals
Monthly
As gold shows no return back to 1100 lows - it keeps reversal moment of our H&S pattern pretty nice by far. Although last week market has shown greater volatility, but still it is too small to make any impact on monthly chart.
Fundamental background for gold market right now is very blur. D. Trump victory and uncertainty around its economy policy, massive political turmoil in Europe and foreign affairs do not let us to estimate clear fundamental picture by far. Although price behavior, short-term sentiment and commodities performance mostly supports idea of bullish reversal pattern here (at least now). At the same time many world top analysts (such as Barnabas Gan) worry about more active Fed policy and think that gold could finish 2017 around 1100$. But Fed is out of our control and prediction and last week is great example of this - as chances on rate hike in March doubles.
Right now we can make just some suggestions. As we've said 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. Now this retracement stands in place. It is really big chance that gold stands in a stage of big trend changing from bearish into bullish. US economy shows inflation growing. As we've estimated, commodities across the board have turned to growth.
Besides, any Trump protection policy will be accompanied by big spending and expenses, this will lead to grow of inflationary expectations and could lead even to more hawkish Fed policy. Thus, we mostly gravitate to idea that gold now stands not in pause of bear trend, but on the eve of new bull trend. Also we expect big structural shifts in EU economy, diminishing Brussels governing role, taking direction on convergence with Russian economy, and through Russia economical infrastructure - with Middle East and Asia.
But our technical "deep" retracement still could be different. Currently, as market stands at the edge of 1170 Fib support, we could talk on 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...
That's being said gold stands at the area where the bottom of right shoulder should be formed. Thus, our first step on this long-term time frame has been completed - "we suggest further drop on gold, at least to 1160-1180 area."
As we've said almost month ago - we're coming to second step how we've specified it - "watch for validity of H&S pattern." Rally that we see right now is not bad, it holds rather well, but it seems that it is still lack of confidence a bit, although COT data and SPDR fund statistics starts to support it.
Here we come to idea of another reversal pattern. If retracement will be too deep, back to 1000$, gold still will keep chances to reverse up, but by another reversal pattern - Double Bottom.
So, as you can see here we've got big journey ahead while we will estimate what we really have - either H&S or Double Bottom. It means that we should be extra careful to patterns that will be formed on daily chart.
Weekly
In general gold stands well on long-term weekly chart - channel has broken up and re-tested by 1.618 AB=CD target. Then gold has turned up again, erased reversal week and B&B and re-tested 1251 lows. This action looks very well from bullish point of view. Long-term bullish crucial point is 1130 lows. Logic is simple here. From perspective of monthly H&S pattern - gold has completed all necessary targets to form right shoulder - downward AB-CD 1.618 extension has been completed and also price has reached 5/8 major Fib support. It means that if gold will drop below this level - it will mean that H&S has failed.
Last week we've pointed on 1278 resistance level as possible destination of upward action. Right now we see a bit irrational behavior from technical point of view - while market has no barriers above, still turns down and doesn't touch resistance level. We do know reason for that - Fed more aggresive hints on rate hike in March. This is fundamental event and it is overruled technicals. Still, usually, if even market shows clear reaction on some fundamental event by breaking normal market mechanics - later, it makes effort to complete technical as well. It means that while first reaction will fade out a bit - gold could make an attempt still to touch 1278 resistance.
Of course we do not call to go long blindly right now, as we have here bearish engulfing as well. But we still will be watching for bullish patterns and signs on daily and intraday charts.
Daily
Trend is bearish on daily chart. Here we already has discussed a bit "unnatural" downward reversal as market has not completed our AB=CD pattern here and dropped. Still retracement is small by far - gold market even holds harmonic retracement swing. Besides, as soon as Yellen almost has promised to rise rate - speculators has turned to profit taking and gold has jumped up from 1220 area. Also right now we do not see any changes in sentiment that could suggest and support deeper retracement, say to 1180.
Thus, as market still holds above 1230 support, it keeps chances on immediate upside continuation and completion of 1278 target. If still downward action will continue - our next destination point here will be 1210 K-support, MPS1 and daily oversold area.
Intraday
Here we come to real practice and trading plan for Monday session. As you can see gold perfectly has completed our AB=CD 1222 target. Thus, on 4-hour chart we continue to monitor possible appearing of H&S pattern, since it will be the key to retracement's depth. If H&S will be formed, daily retracement will be deeper and may be even will reach 1180. Also H&S stands in agreement with weekly bearish engulfing pattern.
On hourly chart it is logical to suggest that gold should reach 1250 Fib resistance - to keep harmony of H&S pattern, but it is also possible that it will stuck in K-resistance around weekly pivot of 1240 area. Actually there is no big difference between these levels - just 8$ per contract, but inability to pass through WPP will be additional bearish sign.
Thus, 4-hour H&S pattern also shows us an area that separates bullish and bearish scenario. If gold on a way up will break 1250 level - it could mean that no deep retracement will happen and price probably will follow to final 1278 destination, as we've talked about it on weekly chart.
Conclusion:
As market has completed first step of our long term analysis - dropped to 1170 area, now we're turning to second step - estimating of validity of monthly H&S pattern. Currently we still think that gold has fundamental background to start long-term bullish trend and two patterns could be formed. Either H&S or Double bottom. As Januray close and Friday action stands strong - gold keeps good chances to form H&S pattern still. At least currently we do not have any visible reasons to doubt upside action. We agree that more agressive Fed policy could stop this rally, as well as agressive D. Trump stimulus program could lead to faster inflation. These issues are beyond of forecasting. That's why we will take them in consideration if&when they will appear.
In shorter term situation unexpected Fed's frankness has pushed gold market in turmoil and rather volatile action. As a result, gold keeps as chances to go up further as turn to deeper retracement. We think that 1250 is a clue to clarity. Upside breakout will lead gold to 1280 target, while appearing of H&S pattern on 4-hour chart will trigger deeper retracement. NFP data will play significant role in estimating of short-term direction.
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 fell 1 percent on Friday and was on track for its biggest weekly loss in 2017 as speculation grew that the U.S. Federal Reserve would press ahead with a rate increase this month.
Fed Chair Janet Yellen said on Friday that the central bank is set to raise its benchmark interest rate later this month as long as economic data on jobs and inflation holds up.
Prior to Yellen's comments, the probability of a Fed move in March had already risen to nearly 80 percent, money markets indicated, after hawkish comments from New York Fed chief William Dudley and San Francisco Fed President John Williams.
"If there has been a conscious effort (to raise expectations for a rate hike) I'm about to join it," Fed Vice Chairman Stanley Fischer told an economists' forum, when asked about comments by other Fed officials this past week that have boosted market odds of a March rate hike.
Spot gold was down 0.03 percent at $1,234.41 an ounce by 2:22 p.m. EST (1922 GMT), after falling 1 percent to $1,222.51, the lowest since Feb. 15. U.S. gold futures for April delivery settled down 0.5 percent at $1,226.50.
Gold prices have retreated more than 2 percent after failing to decisively break through resistance at their 200-day moving on Monday.
"The market has responded very clearly to the more aggressive stance by FOMC members regarding rate hikes in March," Mitsubishi analyst Jonathan Butler said. "It's fair to say that a rate hike in March is pretty much priced into gold."
Gold is highly sensitive to rising U.S. interest rates as they increase the opportunity cost of holding non-yielding bullion, while boosting the dollar in which it is priced.
The world's largest gold-backed exchange-traded fund, SPDR Gold Shares , reported a second daily inflow on Thursday, of 1.8 tonnes, bringing the weekly rise to 4 tonnes. The dollar, however, took a breather after two days of gains on Friday.
COT Report
COT data shows clear bullish sentiment. Open interest is growing as well as net speculative long position. SPDR fund also reports on net inflow during last week. Both these moments do not support idea of downside reversal by far:
Technicals
Monthly
As gold shows no return back to 1100 lows - it keeps reversal moment of our H&S pattern pretty nice by far. Although last week market has shown greater volatility, but still it is too small to make any impact on monthly chart.
Fundamental background for gold market right now is very blur. D. Trump victory and uncertainty around its economy policy, massive political turmoil in Europe and foreign affairs do not let us to estimate clear fundamental picture by far. Although price behavior, short-term sentiment and commodities performance mostly supports idea of bullish reversal pattern here (at least now). At the same time many world top analysts (such as Barnabas Gan) worry about more active Fed policy and think that gold could finish 2017 around 1100$. But Fed is out of our control and prediction and last week is great example of this - as chances on rate hike in March doubles.
Right now we can make just some suggestions. As we've said 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. Now this retracement stands in place. It is really big chance that gold stands in a stage of big trend changing from bearish into bullish. US economy shows inflation growing. As we've estimated, commodities across the board have turned to growth.
Besides, any Trump protection policy will be accompanied by big spending and expenses, this will lead to grow of inflationary expectations and could lead even to more hawkish Fed policy. Thus, we mostly gravitate to idea that gold now stands not in pause of bear trend, but on the eve of new bull trend. Also we expect big structural shifts in EU economy, diminishing Brussels governing role, taking direction on convergence with Russian economy, and through Russia economical infrastructure - with Middle East and Asia.
But our technical "deep" retracement still could be different. Currently, as market stands at the edge of 1170 Fib support, we could talk on 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...
That's being said gold stands at the area where the bottom of right shoulder should be formed. Thus, our first step on this long-term time frame has been completed - "we suggest further drop on gold, at least to 1160-1180 area."
As we've said almost month ago - we're coming to second step how we've specified it - "watch for validity of H&S pattern." Rally that we see right now is not bad, it holds rather well, but it seems that it is still lack of confidence a bit, although COT data and SPDR fund statistics starts to support it.
Here we come to idea of another reversal pattern. If retracement will be too deep, back to 1000$, gold still will keep chances to reverse up, but by another reversal pattern - Double Bottom.
So, as you can see here we've got big journey ahead while we will estimate what we really have - either H&S or Double Bottom. It means that we should be extra careful to patterns that will be formed on daily chart.
Weekly
In general gold stands well on long-term weekly chart - channel has broken up and re-tested by 1.618 AB=CD target. Then gold has turned up again, erased reversal week and B&B and re-tested 1251 lows. This action looks very well from bullish point of view. Long-term bullish crucial point is 1130 lows. Logic is simple here. From perspective of monthly H&S pattern - gold has completed all necessary targets to form right shoulder - downward AB-CD 1.618 extension has been completed and also price has reached 5/8 major Fib support. It means that if gold will drop below this level - it will mean that H&S has failed.
Last week we've pointed on 1278 resistance level as possible destination of upward action. Right now we see a bit irrational behavior from technical point of view - while market has no barriers above, still turns down and doesn't touch resistance level. We do know reason for that - Fed more aggresive hints on rate hike in March. This is fundamental event and it is overruled technicals. Still, usually, if even market shows clear reaction on some fundamental event by breaking normal market mechanics - later, it makes effort to complete technical as well. It means that while first reaction will fade out a bit - gold could make an attempt still to touch 1278 resistance.
Of course we do not call to go long blindly right now, as we have here bearish engulfing as well. But we still will be watching for bullish patterns and signs on daily and intraday charts.
Daily
Trend is bearish on daily chart. Here we already has discussed a bit "unnatural" downward reversal as market has not completed our AB=CD pattern here and dropped. Still retracement is small by far - gold market even holds harmonic retracement swing. Besides, as soon as Yellen almost has promised to rise rate - speculators has turned to profit taking and gold has jumped up from 1220 area. Also right now we do not see any changes in sentiment that could suggest and support deeper retracement, say to 1180.
Thus, as market still holds above 1230 support, it keeps chances on immediate upside continuation and completion of 1278 target. If still downward action will continue - our next destination point here will be 1210 K-support, MPS1 and daily oversold area.
Intraday
Here we come to real practice and trading plan for Monday session. As you can see gold perfectly has completed our AB=CD 1222 target. Thus, on 4-hour chart we continue to monitor possible appearing of H&S pattern, since it will be the key to retracement's depth. If H&S will be formed, daily retracement will be deeper and may be even will reach 1180. Also H&S stands in agreement with weekly bearish engulfing pattern.
On hourly chart it is logical to suggest that gold should reach 1250 Fib resistance - to keep harmony of H&S pattern, but it is also possible that it will stuck in K-resistance around weekly pivot of 1240 area. Actually there is no big difference between these levels - just 8$ per contract, but inability to pass through WPP will be additional bearish sign.
Thus, 4-hour H&S pattern also shows us an area that separates bullish and bearish scenario. If gold on a way up will break 1250 level - it could mean that no deep retracement will happen and price probably will follow to final 1278 destination, as we've talked about it on weekly chart.
Conclusion:
As market has completed first step of our long term analysis - dropped to 1170 area, now we're turning to second step - estimating of validity of monthly H&S pattern. Currently we still think that gold has fundamental background to start long-term bullish trend and two patterns could be formed. Either H&S or Double bottom. As Januray close and Friday action stands strong - gold keeps good chances to form H&S pattern still. At least currently we do not have any visible reasons to doubt upside action. We agree that more agressive Fed policy could stop this rally, as well as agressive D. Trump stimulus program could lead to faster inflation. These issues are beyond of forecasting. That's why we will take them in consideration if&when they will appear.
In shorter term situation unexpected Fed's frankness has pushed gold market in turmoil and rather volatile action. As a result, gold keeps as chances to go up further as turn to deeper retracement. We think that 1250 is a clue to clarity. Upside breakout will lead gold to 1280 target, while appearing of H&S pattern on 4-hour chart will trigger deeper retracement. NFP data will play significant role in estimating of short-term direction.
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.
