FuturesTechs Blog

Recent Candlesticks suggest Gold may be on the turn, at least temporarily, and momentum studies back up the idea. Let’s dig a bit further.

Figure 1: Gold Daily Candlestick Chart - September - November 2010

Figure 1 is a Daily Candlestick Chart for Comex Gold (all sessions). Last week we got up to a high of 1424.3 on Tuesday, but we came back to post a close at 1410.1, right on the opening price. This combination of a wide range with an open and close at more or less the same price gives us a candlestick pattern known as a “Doji”. This is a reversal pattern, as the buyers and sellers matched each other out if we take the day as a whole. We weren’t too concerned by this as we said in our daily commentary on Wednesday:

“So could that be it? Is this great run over? Not yet is the simple answer. We would want to see a few bold support levels taken out before calling it a day on such a strong move, not just one day of (albeit major) uncertainty/nerves”.

Tuesday’s low was 1382.2, a level that held firm on Wednesday and Thursday, keeping 1366, one of our “bold” supports protected. On our reports we post important support or resistance levels in bold type, hence the reference above. On Friday things started to creak, and as we were writing the reports (early on in European trade) 1382.2 was coming under fire. Here’s what we said at this time:

“If we break 1382.2 I’m going to turn my back on the bulls. If we then go on to break 1366 I’m going to turn bearish in the short term and look for a move to 1321.7″.

1382.2 broke that afternoon, and we sold off to 1359.6, ending the session at 1368.3.

Friday’s candle was large and filled/red and it’s real body totally surrounded/engulfed Thursday’s real body (the real body is the difference between the open and the close, and is “filled” (red) or “open” (green) depending on whether the market closed below it’s open, or closed above it’s open respectively.

This left us with another strong reversal pattern called a Bearish Engulfing Pattern.

It also left us with a large red candle, which prompts us to add a “Marabuzo line” to the chart, measuring from open to close on any session with a large move. This can often be a good support or (in this case) resistance level afterwards. In this instance it suggests that 1387 will cap any advances by the bulls, if indeed the bears are now in control of this market.

The old support at 1382.2 is also now a resistance level as this sort of thing often occurs.

So as long as we stay below 1387 we’re now going to look for the move to 1321.7 that we mentioned in  last Friday’s comment, and if this level fails to hold up as support we can think about a deeper setback to 1258.2, or even long term trend support, at 1231.

Many Technical Analysts look at momentum studies with names like MACD (nothing to do with Hamburgers), Stochastics, and RSI (not repetitive strain injury, although sometimes it feels like it!). I don’t weigh on these Indicators heavily, but they can do a great job of adding weight to your thinking at times (or negating it, which can be just as useful). Right now we have a down-sloping RSI, and we have had since the start of October. What this suggests is that since the start of October the upside momentum has been on the wane. We may be making new highs, but the enthusiasm isn’t there to sustain the move at these current levels. This is known as a “Bearish Divergence”.

Obviously this idea will be helped if the Dollar sees further strength. EUR/USD has moved from 1.42 to 1.36 in around 2 weeks as Europe’s problems increase. The Dollar Index is a better barometer, and is the chart below (Figure 2). This shows we are nudging up against resistance at 78.61, where we fell over on October 20th, and again found resistance on October 27th. We want to see this level taken out to encourage this one to head to the next big resistance at 80.17-80.41. This sort of move will likely see further unwinding of Dollar denominated Commodity prices, like Gold!

Figure 2: Dollar Index Daily Candlestick Chart since July.

One final thing to note about this chart is how the RSI has been going up since the middle of October, even though we recnetly made a new low. This is the opposite situation to the Gold chart, and is known as a Bullish Divergence, suggesting that higher prices are around the corner.

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I have been on CNBC this morning talking about the outlook for the FTSE and Eurostoxx after a big week last week.The link for the interview is on our “Media” page here.

The crux of the comment was that the FTSE Futures broke higher to new territory for the year last Thursday, getting above it’s Arpil high at 5796.5. The big question when you get this sort of news driven breakout news is whether it’s sustainable, or whether you should “buy the rumour, sell the news”. In other words are we going to fall over as swiftly as we’ve broken higher? Friday’s price action, I think, offered a clue. We had a big support level at 5822 and it held firm. This suggests to me that the bulls are in charge, and hot to trot.

The next big resistance level above is 6396, the May 2008 high.

The Eurostoxx 50 Future is a different story and still has a few big resistance levels to see off, as I mentioned on CNBC.

Another market making positive noises is Oil, and Brent Crude is now breaking higher, although it has a big level to see off above at 89.58, so we’ll keep a close eye on that situation.

Gold is a hot story and has reached psychologically important resistance at 1400. We aren’t that worried by this level but have a target above that we’re aiming for.

Silver is a standout, and we’re bullish on this one while it’s above $25, and are advising our clients to buy dips to support while we’re holding firm at these levels.

Finally something for the Fixed Income mob. The Bund saw a decent turnaround last week and is back above 130.00. It now looks good to head back to it’s all time high up at 133.26.

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Have a good week,

Cheers,

Clive.

PS. I’ve just joined LinkedIn, so look me up if you want to “connect”!

We are watching these markets very carefully right now as there is a confluence of events that suggest things may be changing. We don;t often start talking the funny-mentals, and we don’t often worry about relationships between markets, however close they may be. But I’m going to make an exception in this instance.

Price action in Oil is probably tantamount to the whole thing. Western economies are on the brink of recession, triggered by the Credit Crunch, but exacerbated by the soaring price of Oil. The Central Banks are meant to raise rates in response to rising inflation, but the current rise in inflation is nothing to do with people over-spending. Far from it. If Central Banks raise rates on this basis it will be disastrous.

We need Food and Energy prices to come down to take the inflationary pressure off.

So now we turn to our charts:

Just looking at the contracts we cover here at FuturesTechs we see the following:

Corn is well off it’s highs. We topped out at 799.2 in June. As I write this we’re trading 625. Pressure off.

Wheat’s all time high was set back in February. The recent high/failure was bang on a Fibonacci retracement level. So that’s going down as well.

Soybeans only topped out in early July and so far haven’t taken out any really big supports on the way back down, although price action in recent days has totally favoured the Bears.

Brent Crude Oil has dropped from a high of $147.50 on July 11th to 129.66 on Friday. We have posted a “Three Black Crows” Candlestick reversal pattern; a significant reversal. That was last Tuesday, Wednesday and Thursday (15th, 16th, 17th July). On Friday (18th July) and so far today (21st July) price action has favoured the Bears (Dolly could spoil the party, though).

So Ags are well off their highs and Oil has had a reaction lower that’s like nothing we’ve ever seen before. At the same time Bond prices are selling off hard (the “flight to quality” trade unwinding) and Equities are staging a recovery.

Most are calling this a “Dead Cat Bounce” (a rally in a Bear market that doesn’t last long!), but when you factor in everything else we’ve just highlighted you start to at least ponder this: Is the worst of the bad news over? Are we “all done” with this sell-off? One thing that favours this is the negativity of the popular press. You know things are about to turn when you can’t find a single bit of good news in the press, and I put the business pages down yesterday morning because it was putting me off my breakfast!!