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Gold Traders' Report - October 26, 2018

Jim Pogoda, Trader, Gold Bullion International 
OCT 26, 2018

Gold firmed last night in a range of $1230.10 - $1238.60, largely fueled by further losses in global equities.

After the bell yesterday afternoon, worse than expected revenues from Amazon and Alphabet helped initiate another round of selling. The NIKKEI fell 0.4%, the SCI was off 0.2%,

European markets were off from 1.5% to 2.4%, and S&P futures were -1.2%.

Some buy stops were tripped over $1232-35 (6 tops, 7/23, 7/25, 7/26, 10/15, 10/16, and 10/24 highs) on the way to its $1238.60 high, but resistance at $1239-40 (double top, 10/23 and 10/25 highs) held once again.

A modest dip in the dollar (DX to 96.55) from a move up in the euro ($1.1359 - $1.1383 – stronger German GfK) also contributed to gold’s strength.

During later European hours, however, the DX climbed to 96.82 – a fresh 2-month high - and knocked gold back to $1232 (lower end of prior resistance held).

The dollar was lifted by weakness in the euro ($1.1383 - $1.1335 – two month low) and the pound ($1.2826 - $1.2777 – two month low) from comments from UK Brexit Secretary Raab blaming the EU for lack of a Brexit deal.

At 8:30 AM, the much awaited US Q3 GDP report was better than expected (3.5% vs. exp. 3.3%), with the Personal Consumption component much stronger than anticipated (4% vs. exp. 3.2%).

The inflation gauges, however, were lower than expected (GDP Price Index 1.7% vs. exp. 2.1%, Core PCE 1.6% vs. exp. 1.8%).

The data continued to take down the probabilities of future 25 bp Fed rate hikes as follows, which was also aided by some not so hawkish commentary from the usually very hawkish Fed’s Mester (rate hikes are based on economic data, not preconceived notions on where they should be):

                           Dec          March             June

      Now             73.6%       41.7%             24.1%

      Yesterday    77.1%       51.1%             33.6%

      1 week ago  83.8%       56.6%             36.7%

S&P futures rallied from 2645 – 2672, while the US 10-year bond yield fell from 3.105% to 3.075%. The DX pulled back to 96.69, and gold rebounded to $1235.

The rally in equities proved short-lived, however, as selling into strength (especially in tech) combined with a miss on the University of Michigan Consumer Sentiment Index at 10AM (98.6 vs. exp. 99) knocked stocks lower (S&P -78 to 2627, 5-month low, negative again for the year).

The 10-year yield slumped to 3.059% (3-week low), and the DX tumbled to 96.31. Gold shot higher, finally breaching resistance at the overnight high and double top at $1239-40.

Short covering stops were hit over this level that took gold to a fresh 3-month high at $1243.45 where resistance at $1244 (down trendline from 4/23 $1336 high) and $1245-46 (double top – 7/16 and 7/17 highs) held.

Into the afternoon, US stocks staged a comeback, and pared much of its earlier decline (S&P- 12 to 2693), with a recovery in oil (WTI from $66.20 - $67.70) aiding the advance.

The 10-year bond yield recovered to 3.091%, but the DX only had a modest bounce to 96.46. Gold tumbled, however, tripping stops under the previous resistance levels of $1239-40 and $1232-35 on the way back to $1232.

Later in the afternoon, US equities turned back lower (S&P ended down 48 to 2657) with the Consumer Discretionary Communication Services, and Real Estate sectors lagging.

The 10-year bond yield slipped to 3.075%, and the DX made a fresh low at 96.28. Gold recovered to $1235, and was $1233 bid at 4PM with a gain of $2.

Open interest was up 9.6k contracts – reflecting a good chunk of options that were exercised from yesterday’s expiration.

Volume was much higher with 276k contracts trading. The CFTC’s Commitment of Traders Report as of 10/23 showed the large funds adding 3.3k contracts of longs and trimming 8.3k contracts of shorts to increase their net long position to 29k contracts.

This was done on gold’s move up to from $1220 - $1240 earlier in the week. However, though the net fund position increased by 11k contracts, the 29k contract level is historically and comparatively still extremely low.

This market is still set up very well to move sharply higher as the short side of gold remains a very crowded trade. With many longs still on the sidelines and a massive gross short position still remaining (163k contracts), gold needs some continued equity market turmoil or another spark to unleash a torrent of buying from shorts covering and sidelined long-side players returning.

While bulls will take today’s $2 gain, they were disappointed with gold’s failure to trip $1244 (down trendline from 4/23 $1336 high), then hold over resistance at $1239-1240 (double top, 10/23 and 10/25 highs), and $1232-35 (6 tops, 7/23, 7/25, 7/26, 10/15, 10/16, and 10/24 highs) – especially given another equity market thrashing, and the 10-year yield failing to hold 3.10%.

However, bulls point to gold’s fairly steady climb – 4 straight sessions of higher lows, 10/13 sessions of higher lows – in the face of a firming dollar (DX was just 13 ticks from 96.99 8/15 high).

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 recent climb from its 9/21 93.81 low to today’s 96.86 high (+3.14%, just shy of 8/15’s 96.99 high) is badly overextended, and expect a correction drive a significant short covering rally in gold.

Bulls will look to get past initial resistance at $1232-35 (6 tops - 7/23, 7/25, 7/26, 10/15, 10/16, and 10/24 highs) followed by $1239-40 (double top 10/23and 10/25 highs), then challenge $1244 (down trendline from 4/23 $1336 high) and $1245-46 (double top – 7/16 and 7/17 highs).

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 today’s Commitment of Traders Report – despite showing a decent amount of short covering from last week – still shows the funds with a massive gross short position (163k 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.

Some bears are concerned with gold’s recent resilience and ability to climb – even in the face of an advancing US dollar. However, bears remain comfortable trading gold from the short side and scale up selling into rallies.

Bears point to the lack of follow-through gold has presented on rallies (failed to take out $1244 today), and its failure to hold above $1239-40, and even $1232-35, and that the massive amount of short covering seen from the past two week’s COT reports (54k 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 today’s COT Report – that despite a decent amount of short covering in the past week - a massive gross short position (163k contracts) remains. Bears will look for some stale bull selling to trigger a move back to initial support at the 100-day moving average at $1222, followed by the $1210 - $1214 area, $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 reports Monday on Japan’s Retail Sales, US Personal Income, Personal Spending, PCE Deflator, Dallas Fed Index, and comments from the Fed’s Evans for near-term guidance.

In the news:

Resistance levels: 

$1232-35 – 6 tops, 7/23, 7/25, 7/26, 10/15, 10/16, and 10/24  highs

$1239-40 – double top, 10/23 and 10/25 highs

$1243 – 10/26 high

*$1244 – down trendline from 4/23 $1336 high

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

$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

$1230 – 10/26 low

$1228 – 10/25 low

$1226 – 10/24 low

$1225 – options

$1222 – 100-day moving average

$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

$1214 – 20-day moving average

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

$1211 – 9/21 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

$1207 – down trendline from 8/10 $1217 high

$1206 – 40 day moving average

$1205 – 50 day moving average

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

$1200 – psychological level, options

$1194 -  10/10 high

$1194 – up trendline from 8/16 $1160 low

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

$1192– down trendline from 4/11 $1365 high

$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