Chart of the Day: The Real Reason For The Gold Bounce

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Gold is back in vogue. Financial networks attributed gold’s recent jump mostly to the dollar’s weakness, which was justified by higher hopes of a trade resolution between China and the US. But facts don’t support that notion. Since the trade dispute began in March, the dollar has become the quintessential safe-haven asset for that specific risk. And yet the dollar continued to sell off on Tuesday, even as investors rotated once again into risk-off trades. Moreover, the USD has dropped 0.46% as of the time of writing — already more than yesterday’s risk-on decline.

The real reason for the dollar weakness is the readjustment of the outlook of further rate hikes after Fed Chief Jerome Powell said that interest rates are close to neutral, in stark contrast to his October statement that rates were a long way from neutral. Since the dollar prices gold, a weaker dollar renders gold cheaper. Also, traders repriced the relatively lower dollar yield.

Chart of the Day: The Real Reason For The Gold Bounce

XAU/USD Daily Chart

While the dollar fell below its uptrend line from Sept. 20, the price of gold reached the highest since July 17. An additional 0.35% rise would challenge the Oct. 26 high of $1,243.73 necessary to extend the rising trend since the Aug. 16 bottom of $1,160.56.

The price has been trending within a rising channel. The bottom is the uptrend line, meeting at the end of where buyers increase orders. The top line is formed at the far end of increasing supply orders. While the uptrend represents support and the supply line projects resistance, demand possesses the volition, as both buyers and sellers have agreed so far that prices are too low and raised their orders. Should a new peak be formed, once the price penetrates the red line marking the previous one, it would indicate that both sides of the equation continue to agree that prices should rise, giving credence to a sustained rally.

The 50 DMA (green) has crossed over the 100 DMA (blue) as the average price of the last 50 days outperformed the average price of the previous 100 days. This crossover is considered bullish because prices are more likely to continue their course. Note, the bullish crossover occurred below the late-November dip to $1,212.50. This fact, too, is meaningful, because it reveals that other traders think so. Another noteworthy point is that the 200 DMA (red) just reached the top of the rising channel, showing it as a “red line” for the supply-demand balance.

On the weekly chart, the price crossed over the 100-week MA this week, but since it’s intraweek it would require a Friday close to lock it in. Both the weekly MACD and RSI provided buy signals.

Trading Strategies

Conservative traders should wait for the price to overcome the 200 DMA, currently at $1,257.36 and consolidate above it. That would increase the probability that rates would remain above the major MA, as new blood came in, when contracts changed hands between profit-takers and new buyers, forming the consolidation.

Moderate traders may risk a long position if the prices closed above the $1,250 psychological level and returned to test the $1,243 October peak level. If the former resistance turned to support, it would suggest the market psychology flipped, boosting another rally.

Trade Sample:

Entry: $1,244, after returning from $1,250 and staying above $1,243 for a few days.

Stop-loss: $1,242

Risk: $2

Target: $1,250, round psychological rate.

Reward: $6

Risk-Reward Ratio: 1:3

Aggressive traders may risk a contrarian short position, hoping the October resistance would hold and taking advantage of the price’s proximity to the resistance level for a close stop-loss.

Trade Sample:

Entry: $1,240

Stop-loss: $1,242, above today’s $1,241.16 high price.

Risk: $2

Target (NYSE:TGT): $1,230, psychological round number and a resistance level throughout late November (thick, green line).

Reward; $10

Risk-Reward Ratio: 1:5

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