Commodities Corner: Our Gold Shorts from 1190 To Test Key Support Target

Commodities Corner

Gold positioning declined by 0.35moz as of Oct 27, based on latest data from the CFTC. Despite this adjustment, gold net longs at 17.15moz were still elevated at around 70% higher than the 12-month moving average. The latest decline in Comex gold positioning was likely due to gross longs closing out positions ahead of last weeks FOMC. This sentiment shift has been profitable for our short positions established at the 1190 level, as our 1100 target is coming into view.

Fundamental Flows

Market participants were generally squaring positions reflects the desire to be flat heading into the October FOMC meeting last week. The data does not capture the post-FOMC flow the COT report due later this week is likely to show further reduction in speculative positions after the more-hawkish-than-expected Fed statement. Looking ahead, the focus this week would be Fed member comments today and the US employment report for October due this Friday.

The Fed’s decision to keep rates on hold during the September FOMC meeting helped redirect some attention back to gold, after noticeably muted interest from traders all year. The USD Index consolidated in recent months has also been a contributing factor to gold’s rebound from the lows that were reached in late July through to early August. Meanwhile, broader macro uncertainty has likely attracted some haven flows at the margin, especially given ample room to re-introduce gold exposures into investor portfolios after positions were reduced considerably in the past couple of years. The FED’s recent statement was a palpable flip flop from September’s more dovish stance and has been the catalyst in a reversal of the recent flows.

Before the October meeting statement there had been rebuilding of positions evident on Comex, where gold net speculative length has increased consistently over the prior five weeks: a total of 14.49moz have been added to reach 17.50moz as of October 10. This was the highest level since February. The recent washout will have likely squeezed late longs, who jumped into positions on the hope of continued reluctance by the FOMC to make any meaningful commitment to a 2015 move.

Relative to historic levels the net long positioning in gold remains moderate representative of about 50% of the all time highs in Gold longs, the recent pullback not only coincided with the more hawkish FED overtone but also came at a point where long contracts had been accumulated over a contracted period of time with Gold trading just shy of $100 off its year to date lows, as is often the case the market started to chase the move as market headlines aroused interest and poor positioning was forced liquidate.

The core driver for price action going forward is going to be tied to FED policy expectations, the recent market repricing of FED rate hike expectations into the back of the year has driven the correction in Gold prices, with the Implied Fed Funds rate jumping from a pre-October meeting level of 36% to print above 50% probability of a move in December.

Technical & Trading Take Away

While the fundamental news flow continues to muddy meaningful advances for gold. Lets take a look at the technical picture and see where the potential premium set ups are developing in Gold.

My current Gold view is closely aligned to my USD index view the analysis for this can be viewed here. Essentially it appears that the USD Index is currently testing some key resistance levels as last week saw a decent pull back from the resistance levels highlighted in my review.

With the USD stalling at resistance it is interesting to note that Gold is testing a potential trend line support as highlighted on the chart below. If Gold can hold the levels highlighted there is certainly opportunity for another corrective bounce.

The price patterns we highlighted tracked very well indeed and price responded directly from the 1190 resistance level highlighted in our last review of the yellow metal, the chart and analysis is below

2015-11-04 11_33_36-Commodities Corner_ Aussie, Down Under 0.70 - Littlefish FX

Trading Takeaway Posted 30th September:

  • I will be monitoring the symmetry pattern suggested in the chart which would see price retesting the resistance pivot towards 1190. I will watch price action in this area for a reversal pattern to enter shorts targeting a retest of 1140 and then on towards 1100 using a stop above 1210.
  • Trading Update – Trail stops to 1110 and target 1080
  • Trading Update – Trail stops to 1090(+1000pips) and target 108
  • Trading Update – 1080 Target hit Risk 200pips Reward 1100pips

The reaction from our resistance has played out perfectly and we are now testing key support, I anticipate we will see a reaction at or just below the market, shorts should hold through this correction as this bounce should attract another round of sales to break the trend line support and test the year to date lows as per the chart below. From these levels or back above 1150 I will reassess the price action and potential patterns.

2015-11-04 11_37_46-

For updates on this trade set up and the other trades I am currently monitoring be sure to follow me on Twitter @LFXPatrick