Gold Traders' Report - December 10, 2018

Jim Pogoda, Trader, Gold Bullion International 
DEC 10, 2018

Gold traded down overnight in a range of $1244 - $1250.40, coming off its 5-month high made Friday and fading a rebound in the US dollar.

The DX rose from 96.36 – 96.79, helped by weakness in the yen (112.23. – 112.89 miss on Japanese GDP), the pound ($1.2757 - $1.2638, fresh 18-month low, reports that May will pull the crucial vote on her Brexit deal, EC says it won’t renegotiate the deal), and the euro ($1.1442 - $1.1401, Brexit woes, miss on Eurozone Sentix Investor Confidence).

Global equities were mostly weaker and gold supportive with the NIKKEI off 2.1%, the SCI down 0.8%, European markets ranged from -0.5% to +0.2%, with trade tensions continuing to weigh. However, S&P futures – which were initially off over 1% and a tailwind for gold – turned higher to 2644 during European time and helped soften the yellow metal. A dip in oil prices (WTI from $52.81 - $51.56, global demand concerns resurface) weighed on stocks.

Gold continued to soften through the NY open, sliding to $1243.50 – where support at the old resistance level held. The yellow metal was pressured by further gains in the DX (96.90), as sterling ($1.2605) and the euro ($1.1396) continued to come off.

US stocks backed down and opened lower, hurt by a report that China granted Qualcomm an injunction against Apple which fed fears that US-China trade tensions would further escalate. News from the UK that May was delaying the vote on Brexit in Parliament contributed to the weakness.

The S&P fell 50 to 2583 , with the Financials and Energy sectors leading decliners. The US 10-year bond yield slipped from 2.864% to 2.829%, but the dollar rose. The DX shot up to 97.18 as sterling was clobbered on May’s vote delay, diving to $1.2507 – a 20-month low, and the euro tumbled to $1.1357. Gold was caught in the cross currents and traded in a choppy fashion between $1244 - $1247.

Into the afternoon, US equities pared losses (S&P -9 to 2624), with the IT (rebound in Apple) and Communication Services sectors leading advancers. The 10-year yield bounced to 2.861%, while the DX hovered just under its prior highs, between 97.05 – 97.15. Gold retreated in response and attempted to breach support at the prior resistance at $1243 – but dip buying emerged to defend that level.

Later in the afternoon, US stocks continued to rally (S&P finished +5 to 2638), with tech shares posting a strong rebound. The 10-year yield ticked up to 2.866% before pulling back to the 2.85% area, and the DX rose to 97.24. Gold briefly broke support at $1243 and dipped to $1241.70, but bargain hunting buying brought it quickly back to $1244. Gold was $1244 bid at 4PM with a loss of $4.

Open interest was up 10.9k contracts, showing a good chunk of new longs (along with some scale up new shorts from bears) from Friday’s advance. Volume was a bit lower with 241k contracts trading.

The CFTC’s Commitment of Traders Report as of 12/4 showed the large funds adding 16.2k contracts of longs and cutting a large amount of shorts - 30.9k contracts - to increase their net long position to 49k contracts. This was done during gold’s rally from $1217 on 11/30 to $1241 on 12/4.

While the funds net long position increased significantly, it is still historically and comparatively very low. This still sets up the gold market very well to move sharply higher as the short side of gold is remains a crowded trade. With many longs still on the sidelines and a very large gross short position still remaining (124k contracts), gold just needs a significant spark to unleash a torrent of buying from shorts covering and sidelined long-side players returning.

Bulls were disappointed with gold’s inability to push past $1250 last night –especially when the DX sank to below 96.40 and equities were tumbling during early Asian time. However, bulls were encouraged that despite the sharp rebound in the DX past 97, gold held fairly well, with support holding ahead of $1243 – the prior resistance level.

Bulls still feel the market has demonstrated a clear upside break of its pennant formation (down trendline from 4/23 $1336 high) and should be able to continue to prey on covering shorts and use the momentum from sidelined new longs to drive the market considerably higher. Bulls remain steadfast in their thinking that gold bottomed at $1160 on 8/16 after a $35 2-day capitulation.

They still have an uptrend in place from that level, and will look to continue to add to long positions on weakness, or on some expected ensuing upside momentum. They maintain the market has been and remains extremely oversold - having dropped $205 (15.0%) since the 4/11 $1365 high, and $149 (11.4%) since the $1309 high on 6/14.

Bulls strongly believe that the dollar’s recent climb from its 9/21 93.81 low to the 97.70 high 4 weeks back (+4.15% to fresh 17-month high) was badly overextended and expect a correction to drive a significant short covering rally in gold. Bulls are looking for continued financial market turbulence to re-test resistance at $1250 and then challenge $1256 – the 200-day moving average.

Bulls feel a breach above the 200-day moving average will be consequential to launch a sharper upside move. In addition, bulls maintain that today’s Commitment of Traders Report still shows the funds with a very large gross short position (124k contracts). They feel the that the short side of gold is still a very crowded trade, and that the gold market is still set up in a highly favorable position to move up from potential heavy short covering and sidelined longs returning to the market.

Bears were encouraged that gold couldn’t rally past $1250 last night, and succumbed to dollar strength off of the Brexit turmoil. Bears remain comfortable selling into strength, feeling moves toward overhead resistance at $1250 and $1256 will continue to provide a good entry points for short positions – especially with gold approaching overbought (Friday’s 14-day RSI at 67.3).

Bears point to the lack of follow through gold has presented on recent rallies, and that the fairly heavy amount of short covering seen thus far from the prior few week’s COT reports has failed to lead to a breach of at least $1250 - as signs of a tired market – and expect a significant pullback to unfold.

Many bears are firm in their conviction that fuel from dollar strength, a return to higher interest rates (though that argument has lost some steam with 10-year yield hovering around 2.85% today and recent Fed speak decidedly more dovish) and a rebound in equities will provide downside pressure on gold, and see prices north of $1200 offering a great opportunity to get short(er).

This iswitnessed by today’s COT Report that a shows a very large gross short position (124k contracts) still remains. Bears will look for a breach of initial support at the trendline at $1222 to bring about a re-test of $1212 (100-day moving average, double bottom), $1210 – the up trendline from 8/16 $1160 low, and then $1200.

All markets will continue to focus on geopolitical events (especially Brexit developments), developments with the Trump Administration (especially on US-China trade, potential legal issues), oil prices, and will turn to reports tomorrow on Japan’s Machine Tool Orders, Germany’s ZEW, Eurozone ZEW, US NFIB Small Business Optimism and PPI for near-term guidance.

In the news:

 

Resistance levels: 

Resistance levels: 

$1245-46 – double top – 7/16 and 7/17 highs

$1248-49 – double top 7/12 and 7/13 highs

$1250 – double top 12/7 and 12/10 highs

$1250  - options

$1257 – 7/11 high

*$1256 – 200-day moving average

$1259-61 – quadruple top – 6/27, 7/4, 7/5, and 7/6 highs

*$1262 – 50% retracement from 4/11 $1365 high to the 8/16 $1160 low

$1266 - 68 – double top, 7/9 and 6/26 highs

Support levels:

$1242 –44 – triple top 10/26, 12/4, and 12/6 highs

$1242 – 12/10 low

$1239-40 – triple  top, 10/23, 10/25, and 12/5  highs

$1235-38 – 7 tops –10/29, 11/1, 11/2, 11/5, 11/6, 11/7, and 12/3 highs

$1237 – 12/7 low

$1235 – 12/6 low

$1233 – 12/5 low

$1231 – 12/4 low

$1228-30 5 tops  – 11/20, 11/21, 11/22, 11/23 and 11/26 highs

$1226 – 27 – double top, 11/28 and 11/30 highs

$1226 – 40 day moving average

$1226 – 20-day moving average

$1225 – options

$1222 – down trendline from 4/23 $1336 high

$1221 – 50 day moving average

$1218-21 – 6 bottoms, 11/19, 11/20, 11/21, 11/23, 11/25, and 11/29 lows

$1217 – 11/30 low

$1212 – 100-day moving average

$1211-12 – double bottom (11/27 and 11/28 lows).

$1208 – 11/15 low

*$1209 – up trendline from 8/16 $1160 low

$1201 – 50% retracement of up move from 8/16 $1160 low to 10/26 $1143 high

$1200 – psychological level, options

$1196-98 – double bottom – 11/13,  11/14 lows

$1191 – 10/11 low

*$1181 - 85 – 9 bottoms - 8/20, 8/23, 8/24, 9/27, 9/28, 10/1, 10/8, and 10/9, and 10/10lows

$1175 – options strike

$1172 8/17 low

*$1160 – 8/16  low

$1156 – 1/4/17 low

$1150 – options

$1146 – 1/4/17 low