Risk-On Market Sentiment and Strong Dollar Keep Gold Rally in Check

Gold futures are trading marginally higher on the day, with the most active December Comex contract currently fixed at $1,234.50 after adding today’s gain of $3.40. These gains are occurring in tandem with a higher dollar. The U.S. dollar index is currently up by 2/10% and fixed at 93.37 after the addition of today’s 19-point gain.

This rally began precisely two weeks ago today on Thursday, October 11, when gold prices surged over $30. On October 11, gold opened at $1,198.20 per ounce and traded to a high of $1,229, settling a little lower at $1,227 per ounce. This move took pricing above three critical levels that had effectively marked the key and critical resistance levels that existed in gold pricing.

The first level that gold broke above was the psychological level found at $1,200 per ounce. This was followed as gold moved through the shorter-term 50-day moving average which occurred at $1,204 (the 50-day moving average is now at $1,207.60), and finally above the 0.618% retracement which occurs at $1,217.60. This dynamic surge occurred as a reflection of a U.S. equities markets under tremendous pressure. The Dow had sustained losses of over 1,300 points on Wednesday and Thursday of that week.

The following week, which began on October 15, gold prices traded sideways with a narrow and defined range of approximately $10. The most noteworthy aspect of last week’s price range is that on each and every consecutive trading day, gold pricing traded above the 100-day moving average and closed below it.

A market technician uses three moving averages (50,100 and 200-day) to determine if a stock or commodity has a short, intermediate, or long-term trend in play. This means that a move below the moving average signals a bearish market tendency, while a price move above a moving average signals a bullish trend.

As such, the move above the 50-day moving average was evidence and supportive of the assumption that gold, which had been in a bearish trend, has reversed as market sentiment shifted to a short-term bullish demeanor. When gold pricing moved above the 100-day moving average earlier this week, it signaled that gold had now entered an intermediate bullish trend.

It is clear that the recent bearish market sentiment in U.S. equities has created a risk-off market environment. This week resulted in the Dow Jones Industrial Average breaking below both the 100 and 200-day moving averages, suggesting that equities have now moved into corrective territory with the real possibility of an extended correction.

Although the Dow gained over 400 points in trading today, current pricing is still below the 200-day moving average and is roughly 3,000 points below the all-time record high which occurred on October 2.

In light of dollar strength and today’s solid performance in U.S. equities, gold pricing fared quite well, exhibiting strong bullish market sentiment.

Wishing you as always, good trading,