Fear And Greed Explorations: Is A Pullback In Gold Looming?

“Play the market only when all factors are in your favor. No person can play the market all the time and win. There are times when you should be completely out of the market, for emotional as well as economic reasons” – Legendary speculator Jesse Livermore

Opening Thoughts

The gold and silver markets bottomed on March 15th and ever since then the precious metals complex has worked itself higher. I longed the SLV (NYSEARCA: SLV) at $17.07 the day that the GLD (NYSEARCA: GLD) gapped up big. If you read my weekly series on silver then you know why I decided to get long at that point in time. However, I recently sold my position, on Monday at $17.48, because I think a short term top is in place. Also, my cost basis and the perceived reward to risk informed my decision to sell. I’m still bullish on the complex, but I have my reservations about the GLD moving higher in the week ahead.

I must start off by stating that this isn’t the orthodox view. The orthodox view, for how gold will trade this week, is best summarized by Edward Meir, an independent commodity consultant at INTL FCStone, who stated today that: ” gold is likely to retain a measure of strength heading into the French elections in about one week’s time. Also, ongoing tensions in North Korea should keep the markets rather nervous”. In case you’re not familiar with how analyst and pundits speak in jaded terms, a “measure of strength” means a bias to the upside. This is a completely logical conclusion, but I think probability favors either a short term pullback or consolidation instead.

Firstly, I don’t think the French election is likely to be a big driver for gold this week because people have been worried about Marine Le Pen winning the French election ever since the Brexit occurred back in June of 2016. It was very apparent at that moment that right-wing nationalistic candidates should be taken seriously and the election of Donald Trump has only proven this even more so. France has an election process that involves two rounds and Marine Le Pen, for months now, has been thought of as a likely candidate to advance to the second round of the election. Furthermore, the EU dissolving after a “Frexit” is the biggest possible “negative” externality of the election, but market participants have been coming to terms with this possibility for a long time now. I use quotes around negative because I think the EU is a poorly constructed economic suicide pact that needs, at a bare minimum, a major overhaul.

Secondly, I know it feels like the beat of war drums are beating ever faster, but I don’t think that this narrative will propel gold higher this week. Sure, I see rising geo political tensions and the possibility of war as a longer term driver for gold, but I’m here to give my view of how the period until my next article comes out is likely to fare. I personally think that the geo political risk narrative has been well represented over the past couple weeks, so it’s going to take serious escalation or further military strikes to help push gold higher at this point. First we had the bombing of Syria on April 6th, then we had the “mother of all bombs” dropped on Afghanistan on April 13th, and during this whole period and even prior to these developments we have been talking about taking serious action against North Korea.

Lastly, it really comes down to price action for me. On Friday, a hang man candlestick, which is a bearish candle that occurs at the top of a rally, provided an early warning that a short term top may be in place. On Monday, we received confirmation when the day’s candle opened within a penny of where the prior day opened, pushed higher in the morning but sold off as it approached key resistance at $123.18, and closed out the day lower. Thus, I have reason to believe a short term top may be in place. Also, I would like to state that the US dollar Index is showing resilience around the all-important 100 level. The US Dollar Index has weakened over the past 6 sessions and experienced some real pressure when Trump stated that the dollar was “too strong”, but I think we start to get some reversion or consolidation around the 100 level over the next few days.

(Shows bumping up against the top of the range, the hangman candle, and a topping wick)

(A look at volatility in the GLD over the past year. (Standard deviation on top and the ATR on bottom))

(A look at the correlation between the GLD and the SLV over the past year. (Red = 10 day correlation, Blue = 20 day correlation, and Green = 60 day correlation) – (essentially you have half a month’s correlation, a 1 month correlation, and a 3 month correlation.))

The COT Report

I think COT reports are much more useful when put into a historical context. Thus, I want to see how bullish or bearish the most recent reports are relative to the most bullish and bearish positioning over the preceding 5 years. A reading of 100 would represent a given group being more bullish than they have ever been over the past 5 years and a reading of 0 would mean that their current position is more bearish than they have ever been over the past 5 years.

The prior reading had commercial producers/users in the 31st percentile and speculators in the 65th percentile. These are middle of the road readings, so they are not highly useful. Essentially, both commercial producers/users and speculators are saying that gold is neither particularly cheap nor expensive. I rely upon Movement Capital for these figures and the latest COT report hasn’t been updated into their model, so I will include a summary of what has happened as of late. Essentially, the trend of divergence between commercial producers/users and speculators has continued.

(Source)

Ichimoku Cloud Analysis

(The chart is of a 1-year time frame) – Tenkan-sen = yellow, Kijun-Sen = blue, Span A = yellow, Span B = blue, Chikou span = grey)

Overall, all three factors that I look for when determining if prices are likely to appreciate are currently in place. The trend is bullish with the price above the Kumo. The Kumo is the green cloud area on the chart shown above. Furthermore, the Tenkan-sen, the fast-moving average, is above the Kijun-Sen, which is the slow-moving average. Also, the Chikou Span, the grey lagging indicator, is confirming the trend with it currently being above the price of 26 periods past.

Support/Resistance

Next level of major resistance – 123.18

Major support – 118.54

Minor support – 119.64

Moving Averages

((The chart is of a 1-year time frame) – moving averages: red = 5 days, orange = 9 days, yellow = 13 days, green = 20 days, blue = 50 days, purple = 125 days, grey = 200 days)

The chart depicts the bulls in full control with the current price being above 7 of the 7 critical moving averages. The moving averages analysis is used as a check on my Ichimoku analysis because it provides further context and sometimes I find contradictions. No contradictions are currently present. The only thing I would like to add here is that the move higher over the past few days has been so strong that the current price is well above its short term moving averages, which adds to the case for consolidation or a short term pullback.

5-day moving average support: 121.5

9-day moving average support: 120.6

13-day moving average support: 120.1

20-day moving average support: 119.61

50-day moving average support: 118.21

125-day moving average support: 116.16

200-day moving average resistance: 120

MACD & RSI Provided for Further Context

MACD: Both the base line and the signal line are above zero, but it looks like a bearish crossover is likely to happen because the signal line is converging with the base line.

RSI: Is currently at 71.33. This means that the current move is fairly overbought and the RSI looks to have formed a rounded top.

The Bottom Line

Overall, the technicals look bullish from the moving average and Ichimoku cloud standpoint. However, you have to put this into further context. There’s hard resistance at 123.18, we’re at the top of a range, a bearish candle stick pattern has just formed, the RSI is overbought, and the MACD is looking to make a bearish crossover. All of these factors point to the GLD either consolidating or experiencing a pullback. However, I remain bullish overall as long as the GLD stays above 120.Good luck.

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Author’s note: I will be posting brief notes on my instablog when I see interesting speculations (day trades & swing trades). I’m doing this because big winners often develop so fast that I can’t write and publish a detailed article in time for readers to be able to capitalize. I’ve just begun to utilize my instablog, but there’s already been some big winners like Catabasis Pharmaceuticals (NASDAQ: CATB), which gained over 60% the day after I mentioned it. Thanks for reading and good luck.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.