Dow Loses 5 Percent in last Two Days and Gold Prices Pop

October 11, 2018 - 5:27pm

 by Gary Wagner

Over the last few days, we have seen market sentiment shift from an overall bullish demeanor in regard to U.S. equities to a bearish outlook. The Dow Jones Industrial Average has now lost over 5% in trading since Wednesday, with a net decline of over 1,300 points in just two days of trading. Following yesterday’s decline of over 800 points in the Dow, today traders continued their liquidation sale and the Dow lost another 545 points.

Dow Closes Below 200-Day Moving Average

For the first time since June of this year, the Dow Jones Industrial Average has closed below its 200-day moving average. This is significant in that technical analysis uses the 200-day moving average to determine whether a market is in a long-term bull or bear trend, and the 50-day moving average to determine whether a market is in a short-term bull or bear trend.

Yesterday’s 800-point decline in the Dow took pricing below its 50-day moving average for the first time since July, and today’s continued selling pressure moves the needle below the longer-term 200 day moving average.

Continued selling would confirm that market sentiment had reached an inflection point earlier this week as traders moved from a bullish to bearish demeanor in regard to U.S. equities.

A combination of higher interest rates, which have been initiated by the Federal Reserve as they raised interest rates for the third time this year, as well as genuine concern that the trade dispute between the United States and China has now become a full-blown trade war were cited as the underlying factors causing investors to lose confidence in the stock market.

Trump Tirade – “The Fed Has Gone Crazy”

President Trump made the following statement in response to yesterday’s selloff in the stock market,I think the Fed is making a mistake. It’s so tight, I think the Fed has gone crazy”. While higher interest rates are definitely part of the underlying causes of the selling pressure over the last two trading days, it is the uncertainty created by the current to trade war between China in the United States that combined has caused market sentiment to reverse so quickly.

Gold Prices Surge as Market Sentiment Begins to Favor Safe Haven Assets

One of the resulting byproducts of the massive liquidation in U.S. equities is a move by investors and traders to the safe haven asset class favoring gold and bonds. Gold futures gained almost 3% in trading today, with the most active December Comex contract currently fixed at $1,227.30, a net gain of $33.90 on the day. While U.S. dollar weakness today provided some tailwinds, the vast majority of today’s gains can be attributed to short covering and traders bidding up the precious yellow metal.

Gold Closes Above Its 50-Day Moving Average

Gold’s massive upside pop to current pricing is not only above the psychological resistance level at $1,200 per ounce but also through the 50-day moving average which is currently at $1,204.20.

The fact that gold broke and closed well above the 50-day moving average gives technical evidence that the bearish demeanor that has been so prevalent in gold pricing might have concluded. It also indicates that the short-term market trend in gold has reversed and is now bullish.

Based on our technical studies, the next real resistance level in gold resides at $1,246.40, with solid support at $1,217 per ounce.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

Sentiment Indicator:

Gold Forecast: Proper Action
Yesterday we sent out a trade alert to buy December gold at the market
Buy December gold @ the market (current 1196.40). Place stop below 1178.50 (1176)
This morning we sent out a Trade Alert to raise your stop to 1221.13
Maintain long gold @ 1196.40 (current $1227.70) Maintain stop @ 1221.13 
Gold Market Forecast
Yesterday’s dramatic decline in US equities are signaling that the trade dispute between China and the United States might have reached an inflection point in which the trade dispute can be more characterized as a trade war. As such today for the first time in a while we have seen a return to favoring safe haven assets over the risk on asset class. Today stocks continued to sell-off now for a second day in a row.
 
Higher yields and bonds as well as the safety of gold are two avenues that investors are turning to protect their equity. Gold could trade much higher and our target is $1246.