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This Week Could Indicate a Key Reversal in Gold

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Gold’s respectable gains on Thursday took a week that was headed for a lower close, to closing fractionally higher for the week. Gold traded to a low of $1269, which is two dollars above the double bottom which occurred in April. It also traded to a high at exactly $1287 which is a Fibonacci retracement of .38%. This retracement level is created from the lows of October 2018 at $1185, to the yearly high of $1350 which occurred in February. The 38% retracement level has indicated a resistance area, with the 50% retracement level clearly defining support. The weekly low visibly reinforced that level.

On Tuesday is when the weekly low was created and at that point a clear pattern could be identified. That pattern was a descending triangle. Wednesday was an inside trading day which still looked as it had a decent probability that a break below $1267 would occur. During that time period we had seen gold fall from $1302, a defined lower high than the previous high of $1314 which occurred in the middle of April.

As we identified the descending triangle pattern, we clearly stated that a rally from this point would require an absolute change in one or more of the fundamental factors which had absolutely influenced the financial markets. The fundamentals that we spoke about were the current trade war, the potential conflict in Iran and Brexit.

On Thursday there was a renewed concern on the trade war, as rhetoric on both sides heightened the real possibility that this dispute has deepened and the timeline needed to resolve this issue had extended. Retaliation for recent actions by the administration such as raising tariffs from 10% to 25%, and this week’s blacklisting of Huawei, resulted in the Chinese digging in deeper. Their outside appearance via statements by government officials indicated that they will not meet with Trump at the G20 meeting.

The South China Post was filled with their reaction. Chinese state researcher said, “Given the current conditions, what can really come out of the G20?” said Zhang Yansheng, the chief researcher at the state-backed China Centre for International Economic Exchanges think tank. It is quite possible that the statements are simply an attempt to save face, and extremely important component of any successful negotiation with China.

The Xinhua News Agency (the official state-run press agency of the People’s Republic) said that, “The People’s Republic [of China] has been standing tall in the East for the last 70 years, it has never lowered its head and it has never feared anyone,” Xinhua said. “History will prove again that bullying and threats by the US will not work.” Although the statement clearly indicated that China is digging in deeper and will not break because of threats, however their economic despair which has been created by this administration with heightened tariffs has extremely hurt their economy and the statements might be false beliefs in that they need to make a deal extremely soon to stop the bleeding created by this trade war.

Today gold reacted in a tepid way when compared to yesterday’s respectable gain. Although it closed higher on the day its entire range was at the upper end of yesterday’s range. The stock market showed clear but modest gains indicating that yesterday’s concern was not as threatening as first conceived.

However, next week will indicate whether market participants believe that the current negotiations have gone south and resolutions are further away when compared to prior beliefs. Gold needs to break above current resistance at $1287, its current close today was at $1284 30. More importantly we need to see gold trade above the current resistance trendline, just above $1293 before technicians will indicate a solid rally has begun.

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Wishing you as always, good trading,

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