Short Term Gold Outlook: 3 Day Rally Sputters-Now What? Likely Drivers, Direction

Guidance for short term gold traders, gold’s technical, fundamental outlook and near term drivers

Summary

-Gold’s 3 day rally drove it above major intermediate term resistance levels, opening the chance for more gains in coming days

-The uptrend weakened mid-Thursday as the USD simultaneously bottomed

-Likely near term fundamental and technical drivers for Friday and beyond

 

 

After a brisk rally, gold has been consolidating its gains since mid-Thursday and remains at a crossroads.

Spot gold pulled back from its highs Thursday, but still ended higher for the 3rd straight day, continuing its breakout above the 1218 resistance area.

That’s strong resistance. It contains both the upper flat channel line (red on the daily chart) and the 200 day EMA (purple on the daily chart).  The recent momentum is more impressive considering that on May 13 gold broke above resistance from its descending April channel as well as its 100 day EMA (light blue on daily chart).

This breakout above all near term resistance suggests possible moves higher into the lower-mid 1220 area in the days ahead

However in the near term the trend has flattened, a normal consolidation move after the recent days’ gains. Since 14:00 GMT Thursday the uptrend has slowly made a minor pullback, but continues to hold on just below 1220.

As today’s Asian session winds down, that consolidation just below 1220 continues. Short term momentum indicators are turning negative. For example:

  • On the 1 hour chart we’ve neutral momentum as the pair is within the middle “neutral momentum zone” of its double Bollinger bands (DBBs) bounded by the orange bands.
  • On the 4 hour chart the pair momentum borders on positive to neutral, as the pair remains on the border of the DBB upper quarter (bounded by the upper green and orange bands) and middle zone.

Longer term traders should note, however that on the daily chart, the pair is still firmly in the upper DBB zone, suggesting further upside.

 

ScreenHunter_01 May. 15 09.03

 

Gold charts clockwise: 1 hour, 4 hour, daily, weekly.

KEY:10 PERIOD CANDLE EMA DARK BLUE, 20 PERIOD CANDLE EMA YELLOW, 50 PERIOD CANDLE EMA RED, 100 PERIOD CANDLE EMA LIGHT BLUE, 200 PERIOD CANDLE EMA VIOLET, DOUBLE BOLLINGER BANDS NORMAL 2 STANDARD DEVIATIONS GREEN, 1 STANDARD DEVIATION ORANGE.

Source: MetaQuotes Software Corp, www.FXGlobe.com

01 May. 15 09.03.jpg

 

Fundamentals To Watch

The primary fundamental driver seems to be the ongoing “short-squeeze” on the EURUSD, which is driving the pair higher and thus the USD lower, and thus gold higher. The usual negative correlation with the USD has been nearly perfect in recent days.

Comparing the gold daily chart above with USD index daily chart below since Tuesday, they’re almost mirror images of each other.

 

 

ScreenHunter_02 May. 15 09.16

Daily Charts of USD Index (top) and Gold (bottom). Note the correlation

KEY:10 PERIOD CANDLE EMA DARK BLUE, 20 PERIOD CANDLE EMA YELLOW, 50 PERIOD CANDLE EMA RED, 100 PERIOD CANDLE EMA LIGHT BLUE, 200 PERIOD CANDLE EMA VIOLET, DOUBLE BOLLINGER BANDS NORMAL 2 STANDARD DEVIATIONS GREEN, 1 STANDARD DEVIATION ORANGE.

Source: MetaQuotes Software Corp, www.FXGlobe.com

 

02 May. 15 09.16.jpg

More fundamentally, this short squeeze is mostly a symptom of fading USD September rate hike hopes after recent weak US data (like Wednesday’s disappointing monthly retail sales report), combined with continued change in the spread between US and German bond yields. Improving German yields have strengthened the Euro and thus weakened the USD. The two currencies almost always move in opposite directions. They’re the two most widely held, and thus buying on one of these currencies is usually at least partially funded with sales of the other.

The only event on Friday’s calendar the might move the USD, and thus gold, could be a strong beat or miss of the forecast for the preliminary University of Michigan consumer sentiment index. Otherwise there are no scheduled events likely to move gold.

 

Conclusion

For the coming 24-48 hours, a dip below the abovementioned prior strong resistance levels would suggest a near term top.

If gold holds on above those levels, the near term technical picture becomes more upbeat and hopes of a break into the 1220s remain alive.

Momentum appears neutral on the 1 and 4 hour charts, remains positive on the daily chart, neutral on the weekly chart.

Lack of meaningful scheduled events suggests gold could continue to drift in a flat trading range unless the above mentioned resistance levels are breached and trigger selling.

 

As always, minimize risk of loss and of emotion-driven trade decisions by having pre-planned stop loss orders ready.

Questions? Contact us at fxglobe.com or call one of our trained trading professionals to assist you. We’re here to help you. Your success is ours!

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DISCLOSURE/DISCLAIMER: The above represents the personal opinion of our Chief Analyst, and is not represented as any guarantee of what will happen by him or fxglobe.com. Trading involves risk, even for those familiar with sound risk management techniques such as those presented in Chapter 5 of Cliff’s book, The Sensible Guide To Forex. Final responsibility for all trade decisions rests with the trader.

 

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