Change in trend

April 21, 2016 02:59 PM

June Gold is the ‘active’ contract. It rallied hard this morning in the 7:00 am (CST), gaining $10 within 20 minutes and extending that slightly further over the next 50 minutes.

More quickly than it rallied, GCM6 fell by over $20 within the next 50 minutes. On shorter term charts like the 30 minute (not shown), the price action shows a ‘turret top.' On the daily chart (below), today’s price action forms a ‘bearish shooting star.' The failure from the bullish advance combined with the small differential between the opening and closing levels, suggest that a change in trend is taking place. The small open to close differential suggests indecision while the rejection from the high puts the onus (of that uncertainty) on the bullish contingency.

Yesterday’s price action formed a bearish ‘hanging man’ and like today, failed to settle above resistance from the April 11-13 ‘bearish three rivers’ pattern. That resistance at 1259.40 is given still greater importance because of the successive failed attempts to close above. The proximity of this most recent bearish price action to the mid-March, 13-month high, should draw selling on any further price weakness.

Longer-term, I am very constructive of gold, but suspect the near-term technical conditions along with market positioning suggests further and possibly substantial weakness.

Stronger oil prices may be assumed by many to mean inflationary pressure is due. While this may be the case, a more important consideration at this stage is the financial stability implications of ‘not falling oil prices.' The strong majority view has been that weaker oil prices could have a serious and negative impact on financial stability. Debt burdens would become overwhelming for many leveraged borrowers if oil prices fell too low or stayed below production costs too long. It was further feared spiking credit spreads could sidetrack or reverse current modest economic growth.

Because oil is seen as stabilizing and will continue to be viewed as stabilizing, even if prices retreat $5-$10 or advance similarly, we should expect credit spreads to shrink marginally further, for economic agents to take on more risk generally and for Treasuries and gold to move lower...absent a further shock. For now, stabilizing financial markets only bring the hope of greater risk appetites and stronger economic performance which would give stronger legs to the recent commodity advance.

There is room for gold to fall toward $1180. Should instead gold advance and close above 1260 anytime soon, we should not discount the bullish implications therein. As such, a nearby stop level is offered for shorts that might agree that prices are due a moderate fall. 

About the Author

Martin McGuire, managing director at TJM Institutional Services