Friday, 7 October 2016

Gold Bull Market's Final Technical Resistance - Part 2

This is a follow-up from this article. If you've already read it, to recap, for most technical analysts, the bull market in gold had already started at the start of the year 2016.

But for the more conservative analysts, if the gold bull market is to be considered as truly out of the bear market, it needs to break out of this long term downtrend line DTL2. If prices stay below DTL2, as far as they're concerned, gold is still in the bear market.

Daily gold spot chart for the multi-year gold bear market from 2011 to 2015 (inclusive)
Daily gold spot chart for the multi-year gold bear market from 2011 to 2015 (inclusive)

As it turn out that this last resistance of the downtrend line DTL2 is also the strongest. This makes sense, because the longer the trend, the stronger the resistance, and this trend spans the whole 4.5 years of bear market. So expect it to be very strong. It takes either many attempts or some catalyst like Bexit to punch though it.

Daily gold spot chart showing Fibonacci retracements
Daily gold spot chart showing Fibonacci retracements
(Click chart to enlarge)

After i wrote the article, the price at "C" was just being rejected by the DTL2. There were 4 more rejections occurred at DTL2 subsequently in the following 6 weeks. This shows how strong DTL2 is. And the stronger the resistance, the stronger the break out, or in this case, break down would be when it eventuates. As the prices got squeezed into the convergences lines of DTL2 and the uptrend line, once the uptrend is broken, a powerful drop should be expected. And that's what had transpired. Newton's 3rd  Law.

The important question now is, where do the prices go from here?

As it turns out, fib retracements are quite instructive. The 3 fib retracements levels of 38.2%, 50% and 61.8% are shown on the right side of the chart.

These 3 fib retracements levels "magically" line up nicely perfectly with important pivot levels. Pretty neat "trick", isn't it?

In fact, these 3 fib retracements will provide supports for the waterfall price drop since 4th Oct.

Let's look in depth at these supports.

38.2%   This is the 1st support level (indicated by "D" @ 1250), which also lines up with the price spike on Brexit on 24 June. In other words, all the gain since Brexit had been wiped out in one drop. This support is below the 200-day MA, telling us that this Fib retracement is a better tool for understanding this correction than the 200-day MA. There's 50% that this support would hold.

50.0%    There's a good chance that price could drop further to this level after chopping around a little while above the 38.2% level. This 50.0% level happens to line up perfectly with the bottom in May (indicated by "B" @ 1210) where the price falls to the uptrend line and bounces up. I think There's 35% chance that this correction would fall to this level.

61.8%    This is the last support where gold bulls' last line of defense @ 1175. If this support fails, the whole sentiment and notion that we're in a gold bull market has to be re-examined. Although i don't think this would likely to happen (I give it a 10% chance). But my opinions should count for nothing. It should be considered as white noise. Only chart-speak matters.

100%    Actually, prices have to drop below 1050 level, or the 100% retracement to consider that we're back to the bear market. But i think things would look very negative once prices drop below 61.8% retracement. I think There's only a 5% chance that this correction would fall to this level (just my way of saying it's close to zero chance).

This sizable correction is overdue and healthy. My own complain is that it didn't come sooner, and as a result, the correct is overwhelming when it does come.

Of course, the 5 touches of DTL2 during July to September can be considered as the 1st attempt of breaking out the last resistance of gold's bear market. Actually my title should read "Gold BEAR Market's Final Technical Resistance". My feeling is that the 2nd attempt to break out of DTL2 would occur in late December or early 2017, and likely to be successful.


Fundamentally, the Fed's voices are getting hawkish since September leading to weakening of gold prices. The most recent hawkish voice came from Fed president Jeffrey Lacker (who lacks the voting right) spooked the gold market on 4th Oct when he delivered a speech stating that interest rates should be "significant higher". This followed by the discussion by ECB about QE tapering. This should have a greater impact on the gold drop.

Regardless if he has voting rights or not, the bond markets has spoken with the yield of 10 year T-Note steadily increased. Is the bond market pricing in a Fed's rate hike or doing the job of the Fed? Or is it telling us that inflation is coming?

Remember this chart below that i put up in my previous post? I mentioned to keep an eye on the 1.6% level on the yield of 10 year T-Note to understand gold price action better.

Yield of 10 T-Notes, Jan - July 2016
Yield of 10 T-Notes, Jan - July 2016

The yield of 10 Year T-Note has risen considerably above this Brexit Plunge level of 1.6%.

Yield of 10 T-Notes, Jan - Oct 2016
Yield of 10 T-Notes, Jan - Oct 2016

The 10 Year T-Note yield has been on the steady uptrend since July. In September, the yield has gone back up to the pre-Brexit level, well above 1.6% level. Logically, gold prices should be back to the pre-Brexit level as well.

When the dollar index (DXY) is moving towards 100, then 10 Year T-Note yield will surely rising towards 2.0%, then gold would be lucky to hold onto $1200 level. If DXY breaks out of 100, then the gold bull market is over. This is something that the Fed wouldn't want to see. I.e. the strong USD, not weak gold prices. But these are short-term possible scenarios. Not likely scenarios.

In the longer and general term, if the yield is going up without accompanied increasing inflation, gold prices will decline. If inflation goes up faster than rising yield, we'll have rising gold prices.

Gold prices follow bond market's lead (not necessarily USD's lead. Only sometimes. E.g. On the day of the Brexit, both USD and gold price spiked upward). In the long term, the Fed would ensure that interest rates is always behind the curve of inflation, leading to rising gold price. I.e. There's a continuing expansion of monetary supply. The Fed (and all central banks) wants inflation. It's an official policy. At the moment, the inflation target is set at 2%, and U.S. economy is having problem reaching that target. That means more money printing is needed.

US Dollar bill with the words "in gold we trust"

That's why gold price has always on the rising trend since 1971 when Nixon removed the gold standard. Gold outperformed all asset classes (share, bond, or property) over the long term because of the Fed's guarantee (Shhh...don't tell anyone about it. It's a secret). The Fed - indeed all central banks - have no choice in the matter; it's baked into our present economic model.

Things can only be changed when we have a different economic model. I can't imagine what that would be. I can't imagine what it takes for that change to take place.

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