Trading outlook:
The positive reaction of the bulls in recent days reflects the underlying strength in the market to continue to buy into weakness. With support building above the $1562 pivot we see any intraday volatility weakness as a chance to buy now. We turn outright bullish again above $1642.
Fundamentals/Newsflow
As traders look ahead to Non-farm Payrolls today the market has been relatively calm. This could all change this afternoon, but there is a sense that two of the three correlations that we focus on are beginning to become less of an issue for the near term direction on gold.
The positive correlation between equities and gold (we take this as the E-mini S&P 500 futures charted against gold) has been far less decisive in recent sessions. Losing the correlation is not a surprise as this positive correlation is not something we expect will be sustained for long before the traditional negative correlation reasserts.
Also we notice that the strong negative correlation with the dollar is starting to reverse slightly. The dollar has been regaining ground recently, but gold has also rebounded in the past couple of sessions.
The one correlation that seems to be holding (for now) is between US Treasury yields and gold (taken as US 10 year yields which we invert, plotted against gold). The correlation is strengthening towards its normal negative position again. Yields falling and gold rising is a safe haven positioning. This seems to be increasingly coming back into play.
Ultimately, there is still a relatively mixed outlook for gold as these correlations seem to be rather uncertain. However, once volatility begins to settle, we look for usual correlations to reassert for gold. Looking longer term, we still believe that with real yields expected to remain low and negative with the massive easing of monetary policy, we expect gold to remain supported and medium to long term positive.
Support
- $1600 – near term pivot
- $1575 – 2nd April low.
- $1560/$1562 – pivot / 31st March low
Resistance
- $1620 – 2nd April high
- $1627 – Intraday high, 30th March high
- $1634 – 30th March high
Technical Analysis
The near term technical outlook on gold remains uncertain as the entirety of Tuesday’s decisive negative candle has been unwound by two solid positive bull candles. However, this is a good reaction once more from the bulls and continues to reflect on a market willing to support weakness on gold. Trading back above the moving averages on the daily chart is clearly a positive signal and it is just whether we can trust that this market (which has been choppy in recent sessions), is now setting up for the next bull run. It is too early to say, but the reaction in the past two sessions has been encouraging. The market bouncing off what is a pivot area of support at $1562 comes with daily momentum indicators ticking higher again (Stochastics and MACD especially). Gold is consolidating this morning (ahead of non-farm payrolls?) but the outlook is looking more encouraging than it did just a couple of days ago. We continue to view near term weakness as a chance to buy and the volatility of payrolls today could give another such opportunity. The hourly chart shows a more encouraging picture is emerging, but resistance between $1625/$1642 which has built up over the past couple of weeks is sizeable. True conviction would be garnered from a decisive breakout above $1642. Initial support at $1600 and then $1562/$1575.
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