Gold Traders' Report - October 9, 2018

Jim Pogoda, Trader, Gold Bullion International 
OCT 9, 2018

Gold traded either side of unchanged last night in a range of $1185.15 - $1191.90, largely fading movements in the US dollar.

Gold climbed to its $1191.90 high during Asian hours, as the dollar softened (DX to 95.67) against some strength in the yen (113.24 – 112.93, safe haven flows, better than expected Japan’s Economy Watcher’s Survey).

During European time, however, gold slid to its low of $1185.15 as the DX climbed to 96.16. The DX was buoyed by a surge in the US 10-year bond yield (3.261% - fresh 7-year high), which moved higher with other global bonds (UK Gilt from 1.68% to 1.716%, German Bund from 0.533% to 0.571%, JGB from 0.15% to 0.16%), and some weakness in the euro ($1.1503 - $1.1431, Italian budget concerns linger), and the pound ($1.3105 - $1.3032, MP Baker says UK should not be afraid to move forward with “no-deal”).

Global equities were mostly weaker and gold bullish, with the NIKKEI down 1.3%, the SCI was +0.2%, European markets were off 0.3% to 0.5%, and S&P futures were -0.5% - with a downgrade of global growth from the IMF (from 3.9% to 3.7% citing trade tensions) weighing. Firmer oil prices (WTI from $74.20 - $74.98, growing evidence of falling exports from Iran), were supportive of stocks.

US stocks turned higher after their open (S&P +10 to 2894) helped by a retreat in the US 10-year bond yield to 3.216%. The DX, which had dipped to 95.99, popped back to 96.10, helped by some hawkish comments from the Fed’s Kaplan (Fed should hike rates at least three more times before pausing to check where it stands relative to the “neutral” rate).

Gold slipped in response, taking out support at $1185 (overnight low, up trendline from 8/16 $1160 low) to reach $1183.35, where support at the 6-bottom support level (8/20, 8/23, 8/24, 9/27, 9/28, and 10/8 lows) held. Decent dip buying was seen, as it was at this level during yesterday’s session.

Later in the morning sterling ($1.3148) and the euro ($1.1488) rebounded on some positive Brexit developments (EU, UK look to agree outline of future trade relationship by Nov, narrow gaps on Ireland border, EU expected to sketch out views on future relationship next week), and knocked the DX back to 95.74. Gold recovered, and climbed to $1190.35 by mid-day.

Into the afternoon, US equities turned negative (S&P -8 to 2876), weighed by comments from Trump on China (repeats threat of more tariffs if China retaliates, says China is not ready to make a deal) The US 10-year yield hovered around 3.21%, while the DX had a modest bounce to 95.81 (slight pullbacks in sterling and the euro, but again –the dollar has shown strength on trade tensions). Gold ticked down in response to $1187.

Later in the afternoon, US stocks drifted back up to near unchanged (S&P finished -4 to 2880). The 10-year yield ticked down to 3.203%, and the DX slid to the 95.63-95.70 range. Gold recovered to $1190.50 and was $1190 bid at 4PM with a gain of $2.

Open interest was up 3k contracts, showing a net combination of new short along with some bottom fishing new longs from yesterday’s decline. Volume surged with 331k contracts trading.

Bulls will take the $2 gain today, given the 10-year yield made a fresh 7-year high and the DX made another foray over 96, while stocks remained fairly firm. While key support was again breached at $1187 (50% retracement of up move from 8/16 $1160 low to 8/28 $1214 high) and $1185 (up trendline from 8/16 $1160 low) as it was yesterday, bulls cheered gold’s ability to rally back and finish above these levels – 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, down trendline from 4/11 $1365 high) followed by $1210 (down trendline from the 8/10 $1217 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.

Bears are trying to remain patient, selling into any strength to re-establish/add to shorts, but some shorts are getting impatient with gold’s resiliency and ability to hold/recover above key support levels. Other bears remain confident that this market will 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 (7 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 comments tonight from the Fed’s Williams, reports tomorrow on China’s New Yuan Loans, Japan’s Machine Tool Orders, UK Trade Balance, Industrial Production, GDP, and Construction Output, US MBA Mortgage Applications, PPI, Wholesale Inventories, and comments tomorrow from the BOE’s Haldane and the Fed’s Evans and Bostic for near-term direction.

In the news: 

Resistance levels: 

$1192 – 10/9 high

$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

$1199 – 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

*$1208 – down trendline from 4/11 $1365 high

$1211 – 9/21 high

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

$1232 – 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

$1186 – up trendline from 8/16 $1160 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