One More Higher High In Gold, Then Down We Go – David Brady (26/07/2019)

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by David Brady, Sprott Money:

Once again we are approaching another FOMC meeting, upon which we will learn whether Gold has already peaked or has one more higher high before doing so. Either way, it is only a matter of time before we get a significant reversal. Until then, unless 1385 is broken, I am only looking up for now.

We have enjoyed a $287 rally from 1167, a rise of 25% since August, and a $187 rally from 1267, a rise of 15% since May 2, to a high of 1454. These numbers will be even bigger if we have not seen the peak yet, but by then, a sizeable reversal will be overdue. We may have to wait until after the FOMC and a spike higher before such a reversal occurs.

The data is piling up against Gold here, just as it did in the opposite direction at the low last August, but it can become more extreme before it matters.

TECHNICALS

Daily

There is a bearish ending diagonal or flag playing out on the daily chart, allowing for one more higher high. A break of that flag to the downside will be first sign that a bigger drop is coming.

The RSI and MACDs are set-up for another negatively divergent higher high, assuming the high is not already in place.

Should Gold rise further, the RSI will become extreme overbought again while also being negatively divergent.

Lower lows occur below 1400 (bottom of E in ABCDE of wave 4) and 1385 in particular, confirming the beginning of the drop.

Seeing the 20D EMA break the 50D MA would also be a confirmation, but a delayed one.

Weekly

The RSI was beyond extreme overbought at its peak of 77 recently, its highest level since the August 2011 high. Each time the RSI was 70 or above in 2010-11, whether followed by a negative divergence or not, it soon led to a fall of over $100 next.

The weekly RSI was also negatively divergent at 1454 and is still extreme overbought at 74.

The MACD Histogram is coming off its highest level since April 2016, and the MACD Line from its highest since August 2016.

A weekly close below 1400 would likely signal the peak is in. The MACD Histogram crossing zero to the downside also.

FIBONACCI LEVELS – 1485 is the 50% Fib of the entire drop from 1923 to 1045. I expect this to be strong resistance, just like the 38.2% resistance was at 1377, and certainly not broken the first time around.

ELLIOTT WAVES

As with all Elliott wave analysis, there are several possible counts, but the common theme in all of these scenarios is that we’re going to get a sizeable pullback one way or the other soon. Possibly to ~1350, 1270, 1170, or even sub-1000, but the latter is a very low probability event, and only if 1167 is broken.

SENTIMENT is extremely bullish up here. There are very few bears left, which increases the likelihood of a major turn downward. I am a long-term bull, by the way, but I go where the data leads me in the short-term, and the signals are pointing south.

POSITIONING

Commercials hit their highest net short position since September 2016 recently. The Banks, since October 2016. One final spike higher in Gold could see them hit new record high short positions before the drop occurs. This would be a mirror image of their record long levels back in August 2018, and we all know what happened next.

Funds have increased their net long position by 228k contracts since April, a massive move, and now are close to 200k net long.More than sufficient for a peak to already be in place , but even more so if we do get one more pop before we drop.

INTER-MARKET ANALYSIS

USDCNH & XAUCNY

USDCNH remains stuck around 6.88. Could it be the calm before the storm? Could we see a spike higher on an escalation in the trade war? This would weigh on Gold in dollar terms.

XAUCNY tagged 10000 and retreated, as forecast, and is now hitting lower lows.

The daily RSI has reset to 54, so plenty of room for this to spike higher to a negatively divergent higher high and then dump.

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