Big Reversal Day for Gold - But will it Last?

That's the question on a lot of minds as a result of the huge upside day in the gold market today.

Gold essentially managed to erase nearly all of the losses on what was began as a big technical downside failure but ended up leaving both sides a bit unsure as to what to expect next.

From my perspective, you had a combination of two things at work here. The first is the payrolls number which came in a bit on the low side of what the market was looking for. In and of itself, the number was not that bad but the market seemed to be looking for a reason to rally and that was as good as any.

But what compounded the move higher was the reports of Russian tanks moving in Ukraine. That was just too much for the already nervous shorts and out they came in droves.

I mentioned the other day about the psychology at work in what the gold perma bulls constantly harangue us about whenever gold experiences a sharp selloff, namely, their poorly dubbed, "Flash Crash".

"GET ME OUT AND GET ME OUT NOW" at any price is the psychology at work on the longs when selloffs are the case. Once the computer selling kicks in, that attitude then takes over. Today it was the bears screaming the same thing, "GET ME OUT AND GET ME OUT NOW" as prices MELTED HIGHER.

Of course, just as all it takes to get a move lower is a few big sell orders, all it takes to get things rolling on the upside like today is a few big buy orders. Computers on the way down and computers on the way up. It is that simple.

Take a look at the daily chart first. That is most impressive!

The price posted a huge outside reversal up day today. Coming after an extended decline like gold has experienced, it is therefore significant from a technical analysis perspective. It indicates that the market is SOLD OUT for now.

Those who have been short should have covered most of their shorts during today's session so as not to lose the tremendous profits that they have accrued over the last couple of weeks. That is where a great deal of the buying originated from today.

Here are some things that I am watching however which, while I respect the day's action, I am noting as obstacles the bulls have yet to overcome.

First is the ten year moving average ( in BLUE). Note it is still declining and note that the rally has not made it back to even this initial of key technical levels. In spite of the tremendous rally today, that 10 day is still lurking overhead. I should also note that it is ABOVE the key downside breakout level of $1180.

The test for the bulls comes early next week to see whether or not they can prove that the breakdown below $1180 was a bear trap or whether this is just another one of those violent short covering rallies that come so often in gold during its bear market and which only serve as higher selling levels from which new bears can enter the market or existing stronger hands can add to their short positions.

The verdict remains out on this in my view but I am keeping an open mind. Previous experience with gold is that it tends to put in these violent upside rallies only to then disappoint with little in the way of additional upside follow through. Will this time be different? I honestly do not know so therefore I am observing.

One thing that the gold bulls have working in their favor at this time however is the confirmation in the gold mining shares as evidenced by the strong chart action in the HUI.

Here is its chart...

Notice that it filled that overhead gap serving as resistance. That is impressive and needs to be respected. Was it an exhaustion gap signifying the end of the move and a final bottom in what has been an inexorably brutal bear market in the gold shares or is this merely the beginning of a new sideways pattern forming above the low of the week near the 146 level? Subsequent price action next week will go a long way towards clearing that up for us.

However, if you take an intermediate term view of the gold chart, that casts a bit different light on the metal which urges some caution about getting too bulled up.

Here is the weekly chart of gold. Some of you will recall this from some previous posts I made when the metal broke down below chart support at the triple bottom near $1180.

Notice that you have what chartists will refer to as a "hammer" pattern, which derives its name from price action "hammering out a bottom". However, this is the key - the CLOSE remains below the former triple bottom of $1180. I would very much prefer to have seen the market recover that broken triple bottom before turning more strongly bullish. Right now I am ambivalent.

Why? Because i am unsure whether this is merely a return to that level to test to see whether or not the same eager sellers are present or is this a move indicating a stronger move higher that can possible recapture a "12" handle?

Again I do not know as we will have to wait to see what we get next week before saying with much certainty. Right now any guesses are just that, GUESSES, and successful traders do not become successful by trading guesses.

If the bulls can take the price ABOVE $1180 and keep it there to end next week, then we have something. If not, I suspect we will see a new range trade develop at a lower level with the bottom near $1130 ( this week's low) and the top wherever the pattern develops.

I will get some more up later on when I have a chance to go over the COT stuff. Suffice it to say it is an easy matter to expect significant short covering will not show up on this week's report. That all happened today!

In the meantime I am worn out from trying to keep my sanity trading beans and cattle, which have both been all over the place as the computers have shoved them around relentlessly this week, especially the meal.

Monday we get a major USDA grains report and perhaps we will see some semblance of normalcy come back to the grains and get rid of some of the volatility that is jerking traders all over the place. But then again, given the brave new world of electronic screen trade and computers incessantly firing off buy or sell orders in huge quantities, I tend to doubt it.