Chart of the Day: The Real Reason For The Gold Bounce
Pinchas Cohen | Dec 04, 2018 15:00
Gold is back in vogue. Financial networks attributed gold’s recent jump mostly to the dollar's weakness, which was justified by higher hopes of a trade resolution between China and the US. But facts don't support that notion. Since the trade dispute began in March, the dollar has become the quintessential safe-haven asset for that specific risk. And yet the dollar continued to sell off on Tuesday, even as investors rotated once again into risk-off trades. Moreover, the USD has dropped 0.46% as of the time of writing -- already more than yesterday's risk-on decline.
The real reason for the dollar weakness is the readjustment of the outlook of further rate hikes after Fed Chief Jerome Powell said that interest rates are close to neutral, in stark contrast to his October statement that rates were a long way from neutral. Since the dollar prices gold, a weaker dollar renders gold cheaper. Also, traders repriced the relatively lower dollar yield.
While the dollar fell below its uptrend line from Sept. 20, the price of gold reached the highest since July 17. An additional 0.35% rise would challenge the Oct. 26 high of $1,243.73 necessary to extend the rising trend since the Aug. 16 bottom of $1,160.56.
The price has been trending within a rising channel. The bottom is the uptrend line, meeting at the end of where buyers increase orders. The top line is formed at the far end of increasing supply orders. While the uptrend represents support and the supply line projects resistance, demand possesses the volition, as both buyers and sellers have agreed so far that prices are too low and raised their orders. Should a new peak be formed, once the price penetrates the red line marking the previous one, it would indicate that both sides of the equation continue to agree that prices should rise, giving credence to a sustained rally.
The 50 DMA (green) has crossed over the 100 DMA (blue) as the average price of the last 50 days outperformed the average price of the previous 100 days. This crossover is considered bullish because prices are more likely to continue their course. Note, the bullish crossover occurred below the late-November dip to $1,212.50. This fact, too, is meaningful, because it reveals that other traders think so. Another noteworthy point is that the 200 DMA (red) just reached the top of the rising channel, showing it as a "red line" for the supply-demand balance.
Get The App
On the weekly chart, the price crossed over the 100-week MA this week, but since it's intraweek it would require a Friday close to lock it in. Both the weekly MACD and RSI provided buy signals.
Trading Strategies
Conservative traders should wait for the price to overcome the 200 DMA, currently at $1,257.36 and consolidate above it. That would increase the probability that rates would remain above the major MA, as new blood came in, when contracts changed hands between profit-takers and new buyers, forming the consolidation.
Moderate traders may risk a long position if the prices closed above the $1,250 psychological level and returned to test the $1,243 October peak level. If the former resistance turned to support, it would suggest the market psychology flipped, boosting another rally.
Trade Sample:
Entry: $1,244, after returning from $1,250 and staying above $1,243 for a few days.
Stop-loss: $1,242
Risk: $2
Target: $1,250, round psychological rate.
Reward: $6
Risk-Reward Ratio: 1:3
Aggressive traders may risk a contrarian short position, hoping the October resistance would hold and taking advantage of the price’s proximity to the resistance level for a close stop-loss.
Trade Sample:
Entry: $1,240
Stop-loss: $1,242, above today’s $1,241.16 high price.
Risk: $2
Target (NYSE:TGT): $1,230, psychological round number and a resistance level throughout late November (thick, green line).
Reward; $10
Risk-Reward Ratio: 1:5
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.