Gold Traders' Report - October 8, 2018

Jim Pogoda, Trader, Gold Bullion International 
OCT 8, 2018

Gold sold off overnight in a range of $1204.15 - $1188 against a firming dollar. The yellow metal tripped sell stops under $1200, $1196-7 (triple bottom - 10/3, 10/4, and 10/5 lows), $1192-94 – (5 bottoms, 9/12, 9/14, 9/17, 9/21, and 9/23 lows) on the way to $1188, where support there from the 9/11 low and in front of $1187 (50% retracement of up move from 8/16 $1160 low to 8/28 $1214 high) momentarily held.

The DX traded up from 95.59 – 96.01, buoyed by weakness in the yuan (6.865 – 6.927, China’s central bank cut the reserve requirement for banks – concerns about economic impact of ongoing trade war), the euro ($1.1530 - $1.1465, misses on German Industrial Production, and Eurozone Sentix Investor Confidence, Italian budget issues still unsettling), and the pound ($1.3133 - $1.3028, caution setting in after Brexit optimism).

News of progress in talks between North Korea’s Kim and Secretary of State Pompeo was another bearish factor for gold. Global bond yields - which have run up dramatically over the past and have been gold bearish - turned down overnight – but couldn’t stem gold’s decline.

While the US bond market was closed for Columbus Day, the UK Gilt yield slipped from 1.724% - 1.68% and the German Bund declined from 0.576% - 0.521%. Global equities were mostly weaker and gold supportive with the NIKKEI closed, the SCI -3.7% (back open after Golden Week and playing catch up to global losses last week), European markets were off from 0.6% - 0.9%, and S&P futures were -0.3%. Oil prices were lower (WTI from $74.06 - $73.15, expectations that Iran will maintain some exports) and weighed on stocks.

After the NY open, the dollar climbed further with the DX touching 96.04, helped by S&P futures trimming some losses (2882 – 2890). Gold continued to slide, and took out support at $1188, $1187, and $1185 (up trendline from 8/16 $1160 low) to reach $1184.30, where support $1181-84 (5 bottoms - 8/20, 8/23, 8/24, 9/27, and 9/28 lows) held.

US stocks turned lower after their open (S&P -21 to 2862), with fears of higher interest rates still resonating and despite oil rebounding sharply (WTI to $74.31). The IT, health care, and communication services sectors lead decliners. The DX was tugged down to 95.81, also pressured by a recovery in the pound ($1.3075, upbeat tone in Brexit negotiations), and gold rebounded to $1189.50.

In the afternoon, US stocks battled back to finish near unchanged (S&P -1 to 2885), with the consumer staples, real estate and financial sectors leading the comeback. However, the dollar worked lower (DX to 95.71), pressured by a continued recovery in the pound ($1.3097), and the euro ($1.1499). Gold clawed back above the trendline at $1185 and the 50% retracement level at $1187 to reach $1189. The yellow metal was $1188 bid at 4PM with a loss of $15.

Open interest was up 4.5k contracts, showing a net of new longs from Friday’s advance. Volume was lower but still healthy with 270k contracts trading.

Bulls were disappointed with gold’s excessive $15 drubbing today, and its failure to hold key support levels ($1200, $1196-7, $1192-94) despite the DX trading only marginally higher, and the pullback in global bond yields. However, they were encouraged that support at $1181-84 (6 bottoms - 8/20, 8/23, 8/24, 9/27, 9/28, and 10/8 lows) held, and that gold was able to finish over $1185 (up trendline from 8/16 $1160 low) and $1187 (50% retracement of up move from 8/16 $1160 low to 8/28 $1214 high – keeping some bullish technical arguments alive.

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 are looking for gold to retest initial stubborn resistance at $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), followed by $1210 (down trendline from the 8/10 $1217 high, and down trendline from 4/11 $1365 high), $1213-14 (triple top – 8/13, 8/28, and 9/13 highs) and then $1216-18 (5 tops, 8/6, 8/7, 8/8, 8/9 and 8/10 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 Friday’s Commitment of Traders Report showing the large funds added to their net short position (now 22k contracts net short - turned short 7 weeks ago for the first time since 2002) and with a massive gross short position (214k contracts –short side of gold an extremely crowded trade) leaves this market set up in a highly favorable position to move up from potential heavy short covering and sidelined longs returning to the market.

Some bears took profits ahead of key support levels today, and will continue to look for any strength to re-establish/add to shorts. Other bears are looking for this market to trade significantly lower - believing that gold’s recovery rally ($1160 - $1214) has been completed. They point to its repeated inability to take out the $1214 double top (despite some bouts of dollar weakness) and repeated violations of up trendlines from the $1160 low on 8/16 as evidence that the yellow metal will continue its decline. This is witnessed by Friday’s COT Report showing the large funds added to their net short position and have constructed a hefty 214k gross short position.

Bears feel fuel from dollar strength, higher interest rates and soaring equities will continue to provide downside pressure on gold. They will be gunning for stops below today’s low at $1181 - 84 (6 bottoms - 8/20, 8/23, 8/24, 9/27, and 9/28 lows) to lead to a test of $1175 (options strike) and then $1171-73 (quadruple bottom – 8/15, 8/17, 1/6/17 and 1/9/17 lows).

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 Trade Balance and Economy Watchers Survey, China’s Foreign Direct Investment, German Trade Balance, US NFIB Small Business Optimism Index, and comments from the Fed’s Kaplan and Harker for near-term guidance.

In the news: 

Resistance levels: 

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

$1193 – up trendline from 10/19/08 $682 low

$1196-7 – triple bottom - 10/3, 10/4, and 10/5 lows

$1197 – 40 day moving average

$1198- up trendline from the 8/16 $1160 low

$1198 – 20-day moving average

$1200 – psychological level, options

$1200 – 50 day moving average

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

$1211 – 9/21 high

*$1210 – down trendline from 8/10 $1217 high

*$1210 – down trendline from 4/11 $1365 high

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

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

$1220-21 – 8/2 and 8/3 highs

$1225 – 7/30 high

$1225 - options

$1227-28 – 7/27, 7/31 highs

$1233 – 100-day moving average

$1234-35 – triple top, 7/23, 7/25, and 7/26 highs

$1235 -38 – 6 bottoms –7/16/18, 7/13/18, 12/12/17, 7/18/17, 7/19/17, 7/20/17 lows

$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:

$1187 – 50% retracement of up move from 8/16 $1160 low to 8/28 $1214 high

$1185 – up trendline from 8/16 $1160 low

$1181 - 84 – 6 bottoms - 8/20, 8/23, 8/24, 9/27, 9/28, and 10/8 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