Gold bulls run out of breath

The weakness could extend further, similar to the situation in 2016
Chief Investment Office01 Oct 2019
Photo credit: AFP Photo

Chart used with permission from Bloomberg Finance LP, as of 1 October 2019.

In early September, gold printed a 1557 high, which showcased a strong multi-year advance from its December 2015’s significant lows around 1046. But gold struggled to maintain its upside rhythm as it dipped and only managed to recover a 1535 high. This is a testament of a tired market, as it failed to garner higher highs.

This is similar to a scenario in 2011 when there was a huge divergence gap between the non-commercial (speculative accounts) and commercial (industry insiders) positioning. This divergence signal saw gold retreating against a major 1921 peak, and was subsequently mostly defensive  trading much lower to lose 45% during the next four years.

The speculative market is buying gold but the price is coming off. Revisiting 2016’s historical parallel, gold needed a 18.3% decline to flush out misplaced longs.

The price behaviour is consistent with what was projected in 10 September’s FX Tactical. We initiated a short at 1520 after harvesting our long-held bullish tactical long. A bearish Tenkan-Kijun crossover on the Ichimoku chart further dampened the price, and added conviction to our current tactical bearish view.

On the shorter-term four-hourly charts, gold is also held back by a plausible bearish head-and-shoulders top. Having this pattern in sight enables us to retrofit and re-adjust our levels. Gold has finished a five-legged advance bearing 1-2-3-4-5 and is prodding a three-legged abc corrective pattern. An equality target that measures the distance of c = a is 1468.

The evidence at this stage is affirmative of our view, but if gold does not revert higher, the weakness can still possibly extend to a larger 1.618% price extension move that eyes 1423 (where the 100-day moving average rests). This would require further evidence, but bear in mind  the historical parallel of gold’s 18.3% drop in 2016.

Overall, gold’s explosive 21.9% rally from end May appears exhausted, and this is mostly in tandem with signs that it is either in a later stage of an up-move or has entered the initial points of a trend lower.

At this stage, we have yet to see the complete clarity of a “pull the rug out from under” move in the works, but we will not dismiss that scenario.

The price exhaustion is, however, apparent on the weekly charts where gold went as high as 3.48 standard deviations from the mean (suggesting that it is overbought) accompanied by a toppish technical price profile.

We re-fit our strategy but maintain our 1520 tactical short, looking for 1450 as a harvesting point (a 4.6% gain on the tactical short), against a lower invalidation point at 1505.

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