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Gold Traders' Report - October 31, 2018

Jim Pogoda, Trader, Gold Bullion International 
OCT 31, 2018

Gold moved lower again last night in a range of $1214.80 - $1222.85. The yellow metal failed to hold above key support at $1219- 21 (100-day moving average and 5 bottoms - 10/15, 10/17, 10/18, 10/22 and 10/29 lows), and tripped some long liquidating sell stops below this level to take it to its low of $1214.85.

A continued rebound in global equities – follow-through from yesterday’s strong gains in the US – helped soften gold with the NIKKEI up 2.1% (BOJ cuts px forecasts, reinforcing it will maintain massive stimulus program), the SCI was +1.4% (despite misses on PMI data), European shares rose from 1.5% to 2.4%, and S&P futures were +0.6% (earnings from GM and Facebook lift sentiment).

Firmer oil prices (WTI from $66.14 - $66.97, larger than expected draw in US gasoline stocks) aided the move in stocks. A tick up in the US 10-year bond yield (3.125% - 3.151%) and a stronger dollar (DX to 97.07, fresh 16-month high) also contributed to gold’s decline.

Weakness in the yen (112.91 – 113.33) from the BOJ’s dovishness along with liquidation of some safe haven longs and the euro ($1.1360 - $1.1330) on weaker German Retail Sales combined to prop up the greenback.

After the NY open, stronger readings on US ADP Employment (227k vs. exp. 187k) and the Employment Cost Index (0.8% vs. exp. 0.7%) helped lift S&P futures to 2715 (+30), and took the US 10-year bond yield to 3.159%.

The DX - which had pulled back below 97 - shot to a fresh 16-month high at 97.19. Gold fell further in response, and slid to $1212, where support from the old double top resistance at $1211-13 held.

US stocks opened stronger, and continued to firm into the late morning (S&P +46 to 2729) shrugging off a miss in the Chicago PMI (58.4 vs. exp. 60).

The 10-year yield hovered around 3.15%, but the dollar sold off (DX to 96.87) against strength in the pound ($1.2733 - $1.2830) and the euro ($1.1309 - $1.1346) on comments from UK Brexit Secretary Raab that a Brexit deal should be done by Nov 21. Gold was caught in the cross-currents but managed to climb modestly to $1217.

In the afternoon, US equities extended their gains (S&P +54 to 2737 ) with sharp gains in the IT, Communication Services, Financials, and Consumer Discretionary sectors leading gainers.

The 10-year yield was either side of 3.15%, and the DX rebounded to 97.20. Gold pulled back in response, but strong dip buying limited the downside to $1212.50 - in front of the morning’s low.

Later in the afternoon, US stocks trimmed some gains (S&P finished + 29 to 2712), weakened by comments from White House Economic Advisor Larry Kudlow that Democratic gains in Congress would hurt financial markets. The US 10-year yield remained steady around 3.15%, but the DX pulled back to 97.04. Gold clawed back to $1216.75, and was $1216 bid at 4PM with a loss of $6.

Open interest was off 6.7k contracts, showing a net of long liquidation from yesterday’s decline. Volume was a little lower with 233k contracts trading.

Bulls were disappointed with gold’s $6 drop today and its inability to hold over its 100-day moving average at $1220. However, some bulls were comfortable with today’s pullback – especially given the second straight strong session for equities, the US 10-year bond yield recapturing the 3.15% level, and a 16-month high in the US dollar.

They see the $31 pullback from Friday’s $1243 high as a corrective pullback within its current uptrend and 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 97.20 (+3.61% to fresh 16-month high) is badly overextended, and expect a correction drive a significant short covering rally in gold.

Bulls will look to build a base between $1204 - $1212, and then look to re-challenge the 100-day moving at $1220, followed by $1230-31 (5 tops - 10/17, 10/18, 10/19, and 10/22, and 10/30 highs), $1239-40 (double top 10/23 and 10/25 highs), then test $1242 (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 last Friday’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.

Bears welcomed finally breaching the 100-day moving average at $1220, along with the $6 decline. However, some remain concerned with gold’s recent resilience and ability to climb even in the face of an advancing US dollar – especially with the DX making 16-month highs.

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 last Friday), and its failure to hold above $1239-40, $1232-35, and the up trendline at $1224 yesterday, 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 continue to unfold.

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

This is witnessed by Friday’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 aggressive stop-loss selling under the 100-day moving average at $1221 to trigger a move back to 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 tomorrow on Japan’s PMI, China’s Caixin PMI, UK PMI, BoE MPC Meeting, US Challenger Job Cuts, Nonfarm Productivity, Jobless Claims, Markit Manufacturing PMI, Construction Spending, and ISM Manufacturing for near-term guidance.

In the news:

Resistance levels: 

$1218 – 20-day moving average

$1220 – 100-day moving average

$1219=21 – 5 bottom, 10/15, 10/17, 10/18, 10/22 and 10/29 lows

$1223 – 10/31 high

$1224 – 10/29 low

$1225 – options

$1225 – up trendline from 10/12 $1216 low

$1230-31 – 5 tops - 10/17, 10/18, 10/19, and 10/22, and 10/30 highs

$1235 – double top – 10/24 and 10/29 highs

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

*$1242 – down trendline from 4/23 $1336 high

$1243 – 10/26 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:

$1212 – 10/31 low

$1211-13 – double top, 9/13 and 9/21 highs

$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 – 40 day moving average

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

$1207 – 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

$1188– 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