Wednesday, March 17, 2010

Gold Stalls As Rally Drains Away

Although the overnight action for gold built on yesterday's strong rally, that additional gain vanished when regular trading opened. The lower-than-expected raw wholesale price index figure had an influence, but the main cause seems to be buyers' exhaustion and a pickup in the U.S. dollar.

When regular trading opened, gold was hovering around $1,128. From 8:20 to 9:20, though, the metal entered a three-stage decline that took it down to just above $1,123. The price pulled up to $1,128, but that pullback didn't hold; another decline took hold until 11 AM ET, leaving the price at $1,122. Although there was a rally since then, $1,125 has gone from a support level to a resistance level. The major resistance level, at $1,130, was only breached this morning and only for two unsustainable periods.

As of 11:50 AM, spot gold was at $1124.10 for a loss of $1.80 on the day. The Kitco Gold Index divided the overall loss into $0.40 attributed to predominant selling and $1.40 to a strengthening greenback.

The U.S. Dollar Index did recover, after bumping in to the 79.5 support level early this morning. When regular trading opened, it fluctuated in a gradually rising range centered around 79.7. That range was broken at 11:05, when the Index broke through to almost 79.83 as of 11:11. Since then, it's been trading more indecisively but with an overall rising bias. As of 11:52 AM, the Index was at 79.76.

So far, it's been a somewhat disappointing day but not a wholly unexpected one. Longer-term traders who say "call me when it stays above $1,140" have a point.

As of now, it's be something if the metal gets and stays above $1,125 again. The afternoon will show if it's achieved.


Update: It hasn't been so far, even though the U.S. Dollar Index took a large dip recently. After spending the last hour of the morning in a trading range bordered by $1,123.75 and $1,125, gold dipped below and then lifted above it. Right after 12:30, though, the price took a dive down to $1,120.60. Although that dive was mostly recovered from, the metal was still below $1,125. As of 1:42 PM ET, spot gold was at $1,124.90 for a loss of $1.00 on the day. The Kitco Gold Index assigned -$3.10 to predominant selling and +$2.10 to a weakening greenback.

The U.S. Dollar Index did take a fall, as mentioned above; in fact, it's been falling since 11:37 AM. The decline wasn't uninterrupted, but it was a fairly smooth ride downwards. As of 1:44 PM ET, the Index was at 79.52.

Again, resistance popped up at $1,125 for gold. The rest of the day will show whether or not it prevails.


Update 2: $1,125 did prevail; the gains at the beginning of the day melted into a slight closing loss.

After spending an hour and a half around the $1,124 level, which ended at 2:30 PM ET, gold went into a two-stage decline interrupted by another rest period. By 3:40, the metal had sunk to $1,117.50. The price snapped back to the $1,120 level, though, and continued along there until just before 5:00. A closing rally, normally unusual for the metal, pushed it all the way up to $1,125 where it stopped. As of the clsoe of regular trading, spot gold was at $1,125.10 for a loss of $0.80 on the day. The Kitco Gold Index divvied up the loss into -$0.10 for predominant selling and -$0.70 for strengthening of the greenback.

The U.S. Dollar Index wasn't all that strong earlier this afternoon. It bumped against the 79.5 resistance level just before 2:00, but pulled up afterwards. It was almost at 79.75 by 3:40, making a counterpoint to the mid-afternoon gold decline. For the rest of the session, the Index drifted in a range between 79.7 and 79.75. As of 5:30 PM ET, it was at 79.725.

The daily chart (from Stockcharts.com) shows the 79.5 support level, and the extent to which February's gains have been erased:



In hindsight, the Eurocrisis proved to be more climax than driver; the fact that the Index didn't shoot up during it was a warning sign that its recent bull run wasn't very substantial. (Of course, hindsight is 20/20.) It closed today at almost exactly the same level it was at as of February 9th's, which makes for a less-than-pretty picture for greenback bulls.

Still, 79.5 has held - and the decline that's matched the most recent bear cross in the MACD lines at the bottom hasn't been all that much. The slog upwards has been met by a slog downwards, suggesting that any further fall isn't going to be that great in extent.

One item of note that pertains to the Euro component: last Friday's Committment of Traders report shows that, as of eight days ago, there was a new record high in non-commercial shorting of the Euro. Given how it's performed since, a short squeeze isn't out of the cards; it may already be happening. At any rate, the non-commercials are back in the shorn-sheep category.

Turning to gold: the daily chart, which uses the nearest futures month and whose close is recorded when pit trading ends at 1:30 PM, shows a more extensive decline than the one recorded above:



$1,120 did hold as a near-term support level, but today's result means that the advance lasted only two days. There's a case to be made that today's decline was the result of the metal going too far, too fast yesterday. [See the comments.]

Gold resuming its uptrend tomorrow would be great, but it seems too much to be asked for at this point. Again, the overall chart doesn't give a commenter/prognosticator much to chew on regarding near-term action - and won't unless $1,140 is broken on the upside or a decline emerges in earnest.

A Wall Street Journal report ties with in the too-far-too-fast explanation:

Participants were thinking prices are high enough for the moment after the previous session's marked gains, said Patrick Donnelly, a senior market strategist at Olympus Futures.

The metal was having trouble at resistance at the $1,130 area, he said.
Also, according to another source cited in the article, the decline in the greenback was met with a little skepticism.

It was a day where people were waiting for another shoe to drop; it might tomorrow. The pullback was fairly restrained, all things considered, and tomorrow might see another rally attempt that breaks well above $1,125. We'll see.

2 comments:

  1. Savvy analysts have long noted that as the price of gold might trend upward during daily trading, it has almost never increased by more than 2 percent from the previous day’s COMEX close. Once the price of gold might increase by 2 percent, that event would almost automatically trigger a round of sell orders to either cap the rise or even cause the price to retreat

    Commodity researcher Adrian Douglas reported on his long-term study of the COMEX gold closes. He tracked the percentage change from one trading day to the next. Over the course of the study, the price of gold declined from one day to the next by more than 2 percent over 100 times. It increased by more than 2 percent only six times – and this in a market where the price rose by a huge percentage over time.

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  2. Thanks for your post. It gives reason to be cautious on strong updays.

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