The strong decline in gold on Thursday and Friday of last week marked a definitive price correction as it gave up almost $90 in two days of trading. The sharp decline confirmed that market participants were continuing to digest the exceedingly strong jobs numbers. They were also laser-focused on every word of any Federal Reserve member for insight into their next moves.
Even Chairman Powell commented yesterday about last week’s jobs report because the expectations were that the report would show 188,000 new jobs were added last month and the actual numbers were double that coming in at 517,000. Powell’s comments expressed that even he did not anticipate such a robust report. However, it gave him more latitude to continue the Fed’s hawkish demeanor in that it confirmed that the economy is still strong even after seven rate hikes last year and an additional hike at the January FOMC meeting.
On Friday I expressed that the selloff fell to an important Fibonacci retracement percentage level the 38.2% retracement level. It is almost unanimously agreed by market technicians that a correction to that level is shallow as well as a place that you would look to see if it acts as technical support or if gold continues to lower pricing breaking below that potential support level. The last three trading days have been interesting. On all three days, gold traded to a higher high and a higher low than the previous day which typically occurs in a market that is moving to higher pricing. However, when viewed through a Japanese candlestick chart rather than a traditional bar chart the daily range of the difference in price between the open and close were extremely tight. Because of that, we identify today’s candle type as a spinning top.
Monday’s candle had a much smaller price differential when we compared the open opening price to the closing prices. In the case of Monday’s trading activity, the differential was only a few ticks between open and close. Both candlestick types (spinning tops and doji’s) are found during periods of price consolidation and periods in which neither faction dominates price movement. The combination of three consecutive days that have higher highs and higher lows with very small bodies (the rectangle that is created from the open and closing price) means that the higher levels of gold over the last three days do not solidly indicate that the correction has concluded and a rally has begun.
When we look at the fundamentals that are currently on the minds of market participants the last three days indicate a wait-and-see attitude because traders and investors want more information to fully factor in what they believe the Fed will do next. Considering that this rally began on November 3 with gold at $1619 with one shallow correction on November 15 resulting in a $60 price decline. Gold has been exceedingly strong during the entire rally with the exception of the shallow correction we just spoke about and the selloff that occurred on Thursday and Friday of last week. This week’s price action can be best interpreted as uncertainty on the part of gold investors who need more information to fully factor in the expectations of upcoming rate hikes by the Fed and their resolve to maintain elevated levels with no cuts throughout this entire year.
The fact that this week’s price action conveyed a potential return to bullish market sentiment also contained no real strength in that potential. It is for that reason that we believe that is too early to act on the information available to us both technically and fundamentally.
As of 5:35 PM Eastern Standard Time, the most active April futures contract is fixed at $1888.20 because of today’s gain of $3.40. The dollar was in essence neutral today with fractional gains of 0.06% which indicates even though the gain in gold was small it was almost entirely composed of investors bidding gold prices higher rather than dollar weakness took gold prices higher.
It is for these reasons that we believe neutrality is the best way to look at the current market sentiment of gold investors. As fundamental events unfold they will determine whether gold will continue to trade lower with the current bearish sentiment remaining or pivot from bearish to bullish. this means that price direction and future price action will be the result of fundamental events rather than technical studies.
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Wishing you as always good trading,
