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For those who enjoy entrail reading of price charts as I do, I thought you might find the following chart an enjoyable reading experience. It is a one second chart and shows the tremendous volume that resulted from yesterday's selling outbreak in gold.
It is difficult to get any sense of perspective when viewing the chart on a one second time frame so I am putting up another one with a big longer time perspective on it so that you can see just how large the number of contracts that were that traded.
Here is a 20 second chart - notice how the volume on the recovery higher exceeded that of the volume on the way down.
I must say that the speed at which this thing recovered makes me suspect more of an erroneous trade than anything. Open interest readings in gold showed a sharp drop of some 6,243 contracts in the most active February contract in yesterday's wild session. Overall volume was not particularly high given the huge sell order that hit the pit around midmorning EST. It came in at a mere 158,991 on the screen. Combined with the pit trade volume, it did not even make it 200,000. That is not large by comparison to other heavy volume days.
If this was a fresh sell order which was met by fresh buying, we would have seen it by an INCREASE in the day's open interest. We did not get that.
One thing I can say from looking through the data was that some short-term longs were kicked out of the market on the plunge lower as their stops were hit so we obviously got some decent sized long liquidation. But that long liquidation must have been met by some short covering as well.
Here is the other thing I can say from going through this stuff - the sell off occurred at a key technical price level on the chart. Gold failed to extend higher as a result. The price fell to, but did not break below initial chart support near $1225 or so - YET. If it does, the support zone that brought in buying yesterday was near the $$1210 level will need to hold to prevent a retest of psychological support at $1200. The mining shares are holding up which should give the bulls some consolation. That will need to continue.
Where gold goes from here is anyone's guess at this point but keep in mind that on the intermediate term chart, the bears remain in control of the market until PROVEN otherwise. The weekly chart shows a downturn in the ADX indicating a break in the downtrend but negative directional movement ( RED LINE ) remains above positive directional movement ( BLUE LINE ). Bearish forces dominate as long as that is the case. The level near $1180 is critically important!
Yesterday's selling barrage up near the resistance zone noted on the chart ( from whatever source it was from it makes no difference from a TA standpoint ) effectively checked the upward progress of gold which moved lower in today's session. A late-in-the-day move higher in some of the gold mining stocks pulled gold off its worst levels of the session with the result that it reinforced the initial support level noted on the chart.
So what do we have for now? Answer - a market ranging between $1245 or so on the top and $1225 or so on the bottom. I am noticing that down volume is picking up which has to concern one if they are bullish but other than that I get no clear sense of overall direction as to any trending move in the metal. It continues to move in a sideways direction.
To kick the metal higher and to give it a chance at perhaps some sort of trending move upwards, bulls will need to take out yesterday's high put in just ahead of the selling barrage that was unleashed. That would set up a shot at testing stronger resistance near $1256 that extends to $1260 and then $1265 or so.
Downside support near $1225 must hold firm to prevent a drop back towards $1214 - $1210.
If equities continuing moving higher, I think gold will encounter more selling pressure especially if interest rates on the Ten Year tend to hover around the 2.90% level. These higher rates tend to attract money into Treasuries in search of some stable yields and undercut reasons to own gold in the minds of many investors. Remember, gold needs NEGATIVE INTEREST RATES to thrive. If investors believe inflation is low and if REAL INTEREST RATES are consequently positive, gold will lose a reason to own it.
Gold does seem to have bottomed out for now but looks to me to be a market in search of a reason/catalyst to add to its gains. One has to wonder if the physical market demand for the metal, demand which allowed price to push away from sub $1200 prices very quickly, would still remain brisk if prices were to push much higher. That buying must stay strong as Western investment demand from large specs remains suspect.
Trying to get a read on the gold market has been a bit tricky since we have had to deal with end-of-the-year positioning and now, since the start of the year, index fund rebalancing of portfolios (along with front running of that buying by pit locals). Along with that we have had reports of strong demand for gold out of Asia. If that has not been enough, we all watched a massive selling barrage occur over a one second interval yesterday. Now today we are seeing evidence of the effectiveness of the capping that occurred at a technically significant chart level.
I am noticing a couple of things today that I thought I would share. First is that equities are soaring higher here early in the trading session. That has NOT been the case since the start of trading at the New Year. This is the first UP day in equities since last Thursday. Also, the Yen is weaker today. It did seem that there was a slight correlation between the downward bias in the broad equity markets and the recent strength in gold - a type of safe haven play, perhaps? Now that equities are moving higher today, gold is moving lower. That was pretty much the theme for the latter part of last year.
Another thing I am watching is the price action of the Australian Dollar of late. The Aussie is sometimes viewed as a type of proxy for the broad commodity complex. This stems from the nature of the Australian commodity which remains very dependent on the export of raw materials in general. Old time traders tended to watch the direction or bias of the Aussie to get a feel for where commodity prices ( in general) were headed.
Take a look at the following chart of Gold vs the Aussie ( No, this is not a Mortal Kombat match - if it were, perhaps gold would have a killer combo move to break free!). Look at how closely the gold price has been tracking the Australian Dollar since the middle of last October. The two are moving almost in perfect sync. I do not know how long this relationship might last or even if it is foretelling anything at this point but it is something we may want to at least keep track of for potential, and I stress the word, 'potential' clues to gold's future fortunes.
When I see a chart like this, where one commodity is moving in pretty good sync with another, it tends to reinforce general trading themes in my mind and at a minimum, perhaps get a glimpse into the general sentiment, even if it is only for the shortest of terms. The one thing about trading these modern markets - the themes change faster than some politicians' convictions!
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