December Fed looming, Gold stands at an important inflection point.

Two posts ago, on November 14th, Gold Returns to Critical lows below 1100, I wrote the following.

So now, gold has found some buying around 1073, but has shown a lot of difficulty picking up any steam to push it towards 1100. This is an incredibly significant battle that the longs and shorts will fight out in this range. 40 dollars higher gold looks like a commodity that is finding real support and an ability to hold up dramatically well amidst all of the worlds commodity selling. 25 lower makes gold look very unattractive.

A month later, this still holds true. Despite a temporary move down to 1045, we are more or less in a range. Broadly speaking, that range has been 1060-1080. I think the levels, at least on the upside are becoming a bit clearer, and we can begin to focus on critical price points in anticipation of this week's Fed. 

You might expect I would show a short term chart to discuss these levels, but I believe they apply to much bigger levels. So, let's look at my favorite chart in gold because it tells so much; the three year daily.

The slow moving downward channel gold has been in for years is crystal clear on this chart. 

What I will mention from here on out about this chart is not technical analysis; it is just gold analysis. Even if you have never looked at a chart before, you can see that gold has demonstrated certain clear price pattern characteristics when approaching the extremities within the range.

Notice the very first low in July of 2013. That was the establishment of the lower line of this channel. How long did it spend there? Not long. It quickly rallied up to the top of the channel. Then revisiting this new down channel in December 2014 it rallied relatively quickly to the top of the channel. You can see how this pattern continues throughout the years.

Why is this so important?

Look at where gold is now. It is hovering at the bottom of this lower line. The last time it hung out on the line was this summer after the overnight 50 dollar drop to 1080. It consolidated before rallying nearly 100 dollars. Could we be seeing something similar here? My major takeaway from this chart (which is why I always come back to it for reference) is the speed at which gold rallies off of the lows. It is one of the reasons one might understandably adopt a strong bullish stance. In the last few years, betting on rallies off of the lows of this line have proven to be very profitable.

I will come up with the next argument for the bulls in a few, but there is also a way to see the above chart in a critically bearish light. 

Forget lines on a chart for a second and think about what it means when consolidation occurs at a certain price level.

Consolidation takes place at levels where buyers or sellers at a given point in time don't strongly outmatch the other. There is some buying and some selling, but not enough to push a market heavily in either direction. Over time however, when either the buyers or sellers throw up the white flag, the interest on one side of the market gets cleared out. This allows for a potentially accelerated move once the consolidation has commenced.

If you take a look back at the chart above, gold is consolidating along that lower trendline. Last time it did this it rallied 100 dollars in less than 2 months. So what is potentially bearish? The Speed at which gold sold back off  to here following that rally.

Below I am going to reinsert the same chart above.

Now focus on the lower trendlie. Notice that following December 2013, gold did not interact with this line again until a full year later. In July (only 7 months after gold revisited in November 2014) gold came back retesting the 1080 area. The latest consolidation that gold has been experiencing began in November, and has continued to consolidate for longer than at any previous time gold traded along the line.

There are two elements of this price action on the longer term chart that signal the potential for a strong down move. First, the time intervals that gold is interacting with the bottom of the downtrend are shortening. The return more quickly to this support line shows that rallies are fading more quickly across the time frame you see above. Thus while the market has clearly shown strong buying off of this level, the bull party seems to be ending more quickly.

If Wednesday's Fed decision leads to a break of this line on the downside, I think it opens the door for at least 100 dollars in downside. I would consider a break of 1055 as a true break of this line. The longer a line has held as support, the more likely a break of that support is to lead to swift down move. In the case of gold, a break of support would be confirmation that years of efforts to rally have failed.

Finally, I'd like to focus the other line you see above. Below is gold for the last 10 months or so.

This line you see slices down the middle of the down channel we have been looking at. Notice how the line served as resistance in May and June. You can see how precisely this line served to stand as resistance over the course of the last 8 months. The break above the line led to an accelarated move higher; and soon after, an accelerated down move back to the line. Now, as you can see, gold is consolidating below this line. The last time gold broke above the line in early October, it rallied 60 dollars rather quickly. While chartists might deny the validity of this line, I have more reasons for focusing on it. I have noticed that options demand begins to flip (calls get bid above it, puts get bid below) as gold's price relative to the line changes. Markets are not science. There are clearly others in this market who use this line as a guide for future price, and that is enough to command our attention.

It is rare you get a chance to see so many of the price patterns and trends converge at critical points simultaneously. Right now, as I have tried to convey in this post, gold sits in the middle of some very significant cross currents. It is probably not a coincidence that these cross currents are meeting head on in front of the big December Fed announcement. As it stands there is a greater than 70% chance according to markets that the Fed will raise. So, gold finds itself at a major decision point as markets approach the event (potential rate rise) the markets have been waiting for for years. A break higher opens the potential for a yearly close in the 1180-1200 range where gold has spent so much of its time. A break lower opens up the door for new multi year lows. Even if there is not a big move on Wednesday, there will be potential for big moves in the coming days and weeks. Big events like this tend to exhaust either buyers or sellers. Even if the move is not immediate, the potential for 50+ dollar moves over a 1-2 day period will increase at such a point of buying and selling cross currents.

Wishing everyone good luck this week; I will try to write next weekend and discuss the events of the coming week.

-Ben 

Gold Quietly Breaks 1050

The dollar is what is ruling these markets right now. For the time being, the gold price seems inextricably linked to the dollar. Higher dollar, lower gold; and vice versa. 

There have been some buyers coming in in gold this week, but the dollar spoiled their plans starting around 5 this morning. Bad European economic data caused the dollar to rally. The dollar rally extended at 8:15 when the ADP preliminary employment number came in better than expected. The dollar continued making new highs as Janet Yellen spoke in the afternoon. By the end of her speech (which my angry colleagues tell me I am lucky to have not listened to) the dollar had given up all of its gains, even dipping back below the psychologically important 100 level on the dollar index.

The one thing that has actually been clear in these markets is what data is bullish and bearish for the dollar index. Bad Euro economic data is perceived as bullish dollar. Bad Euro data increases the perceived likelihood of European QE, which would put pressure on the Euro. Positive news in the US (good jobs report) increases the perceived likelihood that the Fed will raise rates later this month. Since there is at least a literal connection between interest rates and the economy, positive US data makes it appear that the Fed is more likely to raise. This, in turn should be bullish dollar.

But what happened this afternoon? As my friend put it, "She made it seem like they were going to raise rates, and the dollar rallied. Then she started talking about what might happen after that, and I just got confused". Apparently, whatever confusing words she used were enough to bring some selling into the dollar, and gold managed to hold a low of 1049.4.

I find it interesting to note that the stock market took a turn to the downside after her confusing speech. I apologize for having not listened to the speech I am referencing, but I have been confused enough by her in the past, and will take people at their word when they tell me she made things unclear. The stock market does not like this uncertainty. We have seen this before. "Raising rates" is not necessarily enough to derail the stock market. We know this because stocks have rallied as the perceived likelihood of a rate raise has increased in the past few weeks. But market uncertainty about the message being delivered by the Fed is a different thing all together.

At this point, most market participants are banking on a December rate hike as an inevitability. A rate hike is thus largely priced into markets. The question will be, how do they describe their future intentions. If for some reason they don't raise rates, gold could see an epic short covering rally. But my contention at this point is that a rate hike does not imply lower gold prices. It will, ONCE AGAIN, be in the language that is used.

I am not much for giving out gratuitous advice, but I'll make an exception this time. Try to go into the announcement flat if you can. That is my game plan. Over the past two years, I have seen what seemed so obvious NOT work on these announcements and major events. I have personally put on what I thought were well thought out positions into these kinds of events, only to lose a month of hard work in minutes. I know, I am not alone on that one.

One of the reasons the risk is so great right now is the general lack of liquidity that is so pervasive across markets. I will write more on this "fake liquidity" next time, but I have been watching the liquidity dry up in the gold futures and options markets for some time now. It has been getting progressively less and less liquid. Take today in gold for instance. ~4500 lots traded on what was clearly a stop getting run. The seller left 2000 lots (offered on the screen). After a few minutes of futures silence, buyers took the seller out. Then, with the exception of one small blip, there were no orders to be seen. One would think that a 6 year low might interest some participants. It didn't. This is not the first low gold has made of late, nor is it the first time the participation following such a low has been a complete dud. To my mind, a multi year low would be reason for interest to pick up, but the volume is telling us otherwise. Rather than watching futures change hands throughout the day, you are seeing intermittent volume spikes, followed by silence. This is the ultimate sign of illiquidity, or at least, lack of participation. If a size player is caught of guard at an illiquid time, it increases the likelihood of a gap move. If you want to hold positions into the Fed announcement (or any time leading up to it) just keep in mind that getting out may be tough if it doesn't go your way. 

This Friday is the jobs report. As a colleague reminds me, trend changes in gold tend to begin on NFP days, and on Fed announcements. We will see how it plays out, and I will write more following Friday’s action.

Good luck,

Ben