The gold market has had quite a climb since bottoming in December of ’08, rallying nearly 50%. I think a solid case can be made that this market is due for a correction. Furthermore, given the variables in play, the first leg of the correction could come hard and fast. As many of you know, I tend to place the general direction of my trades in line with commercial traders. Over the course of time, this has been a proven strategy. However, there are times when it would be foolish to blindly follow a given position when so much evidence is clearly stacked against it. This is a case when a choice should be made- AT MINIMUM – to take either one of the following actions. First, avoid buying the pullback. New long positions should be avoided. Second, crank up protective stops on existing long positions. Investors who have been long the gold market have done well. Whether in the physical gold market or the futures market, those profits should be protected. For those in the physical market, now would be a great time to use commodity futures to lock in profits without having to off load your physical holdings.
The most obvious caution flag we can see is that gold is testing its weekly trend, now coming in around $1170. From a purely technical standpoint, that should be enough to get your attention and cause protective measures to be taken for long positions.
The daily chart shows that gold was unable to make new highs during the “Flash Crash,” and that the recent highs at $1203 are providing the top side of a consolidation level that, when broken will take out the existing trend. The consolidation pattern over the last six trading sessions suggests a fall to $1148 is imminent. Activation of this short term pattern would be a clear violation of the previously mentioned weekly trend.
A deeper look shows divergent technical and inter-market analysis that suggests the gold market is top heavy here. The final chart shows a large build in commercial positions through June and so far into July. Typically, this would be enough buying to push the market above the highs at $1220 and make a strong argument for new highs above $1270. The fact that the market’s reaction has been oblivious to this is a clear warning sign of impending weakness. The lack of a positive response to the commercial buying via the commitment of traders report is clearly visible in the blue line of the last chart as each successive rally attempt has shown less fervor than the last.
Finally, a brief survey of macro- economic analysis shows that the interest rate markets have no pending fears of inflation. The stock market shows the July lows may have been a short trap and market crash fake out. And lastly, the Dollar’s pull back is to be expected after the run up its had and we are already seeing new buying come in to slow its descent.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.