A Tale of Two Cities

Yesterday, as far as the trading/investing world goes, the US economy was on fire and heading north. The combination of the ISM number and the jobless claims had everyone convinced that TAPERING was back on big time. Talk about a change of pace for today when the payrolls number came. The world was coming to an end once again!

The abysmal number, plus the fact that the numbers from the previous months were revised downward, sent convulsions equally as strong as those of yesterday's running through the markets.

There was a total reversal in the price action in the bond market and in the currency markets. Whereas yesterday the Dollar was King of the Hill once again, today it was deposed in unceremonial fashion.

The violence of the price reactions indicate that many traders were whipsawed having taken positions yesterday only to be completely caught off guard by the rotten payrolls number. Shorts were forced out of the bonds as well as some of the other major currencies.

Overnight gold was hit quite violently in Asian trade. I am still unsure of what the exact catalyst might have been but it looks like it was a case of an opportunistic short raiding the market in the thinner conditions and going after downside sell stops. Well, whoever was sure reached them because once the $1300 level gave way, the market literally imploded on itself falling just shy of the next level of chart support that we mentioned here yesterday down at the $1280 level.

Gold was looking quite vulnerable to an even deeper sell off until that jobs number hit the wires. Then, it was a complete upside reversal erasing those losses and moving not only back above $1300, but also through yesterday's closing pit session price. My guess is that the predatory short got taken to the cleaners on that unexpectedly weak payrolls report.

So where are we in gold right now? Guess what  - I haven't a clue to be honest right now. The type of price action that we witnessed tells me that gold is almost completely dependent on each and every bit of economic news that is going to be coming our way. The worse the data is, the better for gold in the sense that it keeps any Tapering Talk  off the table. The better the data, the more chances that the Tapering Talk gains credence and that is a stiff headwind for the metal as that generally means a stronger Dollar and rising interest rates.

From a technical chart perspective, the resistance zone overhead, that is noted on the chart, is still definitely intact. The market is encountering strong selling up there as those who believe that inflation is not a problem are going to go after gold on rallies and sell into those. Based on the latest COT report of this afternoon, that is a growing majority of speculators who were all net sellers this week.

The really interesting fact is that the same COT report shows that the big commercial category, aka the bullion banks in particular, reduced both short and long positions but actually covered more shorts than they did longs this past week. That brings their NET SHORT position to a little more than 5,300, which is stunning for its meagerness! They are very close to becoming net longs for the first time since December of 2001.

The Swap Dealers were net buyers this week but they remain net shorts by about a 2:1 margin. My thinking is that some of those shorts could be hedges instituted for mining companies who are getting back into that strategy, as I have outlined previously here on the site.

Back to Gold - it has been unable to push through the downtrending 50 day moving average and that is emboldening the bears to continue selling at or near that level. Dip buying remains below the market, as evidenced the strong rally off the worst overnight levels, but again, that dip buying is extremely sensitive to the economic news being released.

This week's low now takes on as much significance as this week's high for the market still remains in a range trader with a bit of a weaker bias. If $1280 were to fail for any reason, gold could easily drop another $20 before some buying shows up.

You can see the ADX indicator down below the price and note that it is still in a bearish posture even though the downtrend has stopped. As stated before but I feel needs to be said again, just because a market stops going down does not necessarily mean it is going to start going back up! It could merely start in a consolidation phase and work sideways and perhaps even resume its downtrend at some point. It might also start a new uptrend. We simply do not know and will have to wait and see and act accordingly. Gold is doing precisely this  - it is moving sideways.

Part of the problem that the metal is encountering is the mining shares - they simply cannot sustain any upside movement for long. They were hit once again today with the HUI down nearly 2.5%.

As you can see on the chart, having pushed past a strong resistance level indicated by the chart gap, the market, upon subsequently retesting that level, failed to maintain its gains above it. That is a bearish technical sign. Would be longs over at the Comex notice such things and then back away from the metal fearing another downdraft that will catch them on the wrong side.

On the delivery process for the August gold contract which I promised to monitor on account of all the talk about tightness at the Comex and dwindling inventories, there was nothing much worth noting in the data that was released this morning. JP Morgan continues to be the large stopper with them taking the gold for their house account. Other than that - pretty routine.

I will try to get some more details up later this evening or tomorrow as my schedule permits but make sure to check in over at King World News for the Metals Wrap where I will be discussing some of this with Eric this weekend.