;

Gold Traders' Report - October 23, 2018

Jim Pogoda, Trader, Gold Bullion International 
OCT 23, 2018

Gold rallied sharply last night in a range of $1221.70 - $1239.80. It was resilient during Asian hours, holding near yesterday’s close despite a spike in the DX to a two-week high at 96.16.

The DX was lifted by some safe haven buying which also saw the yen begin to strengthen (112.84 – 112.40) and the US 10-year yield dip from 3.194% to 3.137%) as global stocks tumbled.

The NIKKEI fell 2.7%, the SCI dropped 2.3%, European markets were off from 0.6% to 1.6%, and S&P futures were -1.2%.

Equities were struggling with several geopolitical issues: Saudi isolation around the Khashoggi killing, slowdown in China, continued US-China trade dispute (tough talk overnight from China’s Qingli that China doesn’t fear a trade war), Brexit stalemate, and Italy’s budget issues, along with lower oil prices (WTI from $69.60 - $67.60).

When the dollar turned down during European time (DX to 95.83, softens against continued firming yen – 112.15, rising pound from $1.2975 - $1.3040 on EU proposal for UK wide customs union) gold shot higher.

Buys stops were triggered over $1230-31 (quadruple top - 10/17, 10/18, 10/19, and 10/22 highs) and $1232-35 – (5 tops, 7/23, 7/25, 7/26, 10/15 and 10/16 highs), taking gold to its $1239.80 high – a 3-month high.

Poor earnings reports from 3M and Caterpillar extended the decline in S&P futures and aided gold’s climb just ahead of the NY open.

US stocks plunged sharply through their open (S&P –63 to2693), with large declines in the industrials and IT sectors.

A further tumble in oil prices (WTI to $65.74 – 2 month low) contributed to the move. The US 10-year yield continued to decline on safe-haven buying, hitting a 3-week low at 3.115%.

The DX was caught in the cross-currents and moved modestly (96.05) in a choppy fashion, however, with the pound ($1.2970) and the euro ($1.1449) retreating from prior gains. Gold slid in response, but held in front of the prior $1231 resistance level.

Equities started to rebound by late morning, aided by a comment from While House Economic Advisor Kudlow that Trump will meet with China’s President Xi at the G-20 next month in Buenos Aires.

The S&P pared most of its earlier losses (rallied back to 2753) into the afternoon - with the Consumer Staples, Real Estate, and Communication Services sectors leading the comeback - and finished off 15 to 2740.

The 10-year yield climbed back to 3.173%, while the DX remained choppy but a little lower, trading between 95.80 – 95.95.

Gold continued to pull back in a similar choppy fashion in a range of $1229.50 - $1233, and was also pressured by some hawkish comments by the Fed’s Bostic (Fed sees risk of overheating, doesn’t need to keep our foot on the gas pedal anymore). Gold was $1230 bid at 4PM with a gain of $8.

Open interest was off 2.2k contracts, showing a net of long liquidation from yesterday’s decline. Volume was a little higher with 201k contracts trading.

Bulls were certainly concerned yesterday with gold’s lethargic price action having finally breached and held its 100-day moving average. However, they cheered last night’s rally that saw key resistance at $1230-31 (quadruple top - 10/17, 10/18, 10/19, and 10/22 highs) and $1232-35 – (5 tops, 7/23, 7/25, 7/26, 10/15 and 10/16 highs) broken.

Despite gold having shed half of its overnight advance, bulls are optimistic that $1230 held – especially with the DX hovering just under 96 and the US 10-year bond yield still north of 3.15%. Bulls remain steadfast in their thinking that gold bottomed at $1160 on 8/16 after a $35 2-day capitulation, 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 rally was badly overextended, and expect its correction from the 8/15 96.99 high (up 9.90% since its 88.25 low on 2/14) to continue, and drive a significant short covering rally in gold.

Bulls will look to re-test $1232-35 (5 tops - 7/23, 7/25, 7/26, and 10/15, 10/16highs) and then today’s $1240 high, then challenge $1245-46 (double top – 7/16 and 7/17 highs, down trendline from 4/23 $1336 high). Beyond this, bulls are looking for a move to at least $1262 – the 50% retracement of the move down from the 4/11 $1365 high to the 8/16 $1160 low.

In addition, bulls maintain that last Friday’s Commitment of Traders Report – despite showing a heavy amount of short covering from last week – still shows the funds with a massive gross short position (171k contracts).

They feel the that the short side of gold is still a 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 remain comfortable trading gold from the short side, scale-up selling into rallies. Bears point to the lack of follow-through gold has presented on rallies (failed to hold $1232-35 today) and that the massive amount of short covering seen from Friday’s COT report (46k contracts) failed to lead to a breach of at least $1250 as signs of a tired market – and expect a significant pullback to ensue.

Many bears are firm in their conviction that fuel from dollar strength, higher interest rates and a rebound in equities will continue to provide downside pressure on gold, and see prices north of $1200 offering a great opportunity to get short(er).

This is witnessed by last Friday’s COT Report – that despite a heavy amount of short covering in the past week - a massive gross short position (171k contracts) remains. Bears look for some stale bull selling to trigger a move back to initial support at the $1210 - $1214 area, followed by $1207-09, and then expect a re-test of $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, Q3 corporate earnings, and will turn to comments tonight from the Fed’s George, and reports tomorrow on Japan’s Leading Index, Eurozone PMIs, US MBA Mortgage Applications, House Price Index, Markit Manufacturing PMI, Markit Services PMI, New Home Sales, Oil Inventories, Fed’s Beige Book, and comments tomorrow from the Fed’s Bostic, Mester, and Brainard for near-term direction.

In the news:

Resistance levels: 

$1232-35 – 5 tops, 7/23, 7/25, 7/26, 10/15 and 10/16 highs

$1240 – 10/23 high

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

*$1246 – down trendline from 4/23 $1336 high

$1250  - options

$1251-53 – triple bottom 7/4, 7/5, and 7/6 lows

$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

Support levels:

$1230-31 – quadruple top - 10/17, 10/18, 10/19, and 10/22 highs

$1224 – 100-day moving average

$1225 – options

$1222 – 10/23 low

$1220-21 – 8/2 and 8/3 highs

$1221 – 10/17 low

$1219=21 – quadruple bottom, 10/15, 10/17, 10/18, and 10/22 lows

$1216 – 10/12 low

$1216-18 – 5 tops, 8/6, 8/7, 8/8, 8/9 and 8/10 highs

$1213-14 – triple top – 8/13, 8/28, and 9/13 highs

$1211 – 9/21 high

$1208 – down trendline from 8/10 $1217 high

$1207-09 –10 tops, 8/29, 8/30, 8/31, 9/6, 9/12, 9/14, 9/20, 10/2, 10/3, and 10/4 highs

$1208 – 20-day moving average

$1204 – 06 – double top – 10/5, 10/8 highs

$1204 – 40 day moving average

$1202 – 50 day moving average

$1200 – psychological level, options

$1199– down trendline from 4/11 $1365 high

$1194 -  10/10 high

$1192-94 – 5 bottoms, 9/12, 9/14, 9/17, 9/21, and 9/23 lows

$1191 – up trendline from 8/16 $1160 low

$1185 – 10/10 low

$1181 - 84 – 7 bottoms - 8/20, 8/23, 8/24, 9/27, 9/28, 10/8, and 10/9 lows

$1175 – options strike

$1172– quadruple bottom – 8/17 low

$1160 – 8/16  low

$1156 – 1/4/17 low

$1150 – options

$1146 – 1/4/17 low