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Gold bulls throw in the towel

Gold chart 09 16b

Almost a 2% drop in gold overnight is pretty big. This is what we saw yesterday as the bulls decided to throw in the towel and didn’t defend the support levels at 1676 and 1680. Now the market is moving sideways in a tight range just below a minor (30 min) resistance at 1667. The market is clearly still bearish but a return move to the 1676 – 1680 range wouldn’t be a surprise. So let’s prepare for it but at the same time, we need to keep in mind that gold can still continue lower. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

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So, a strong rally above the 1667.60 level would be likely to move the market to the 1676 – 1680 range and if the sellers re-engage with the market there we should join the party. Alternatively, the resistance doesn’t attract the bears and the market rallies to 1706 or so.

But, if gold fails to stage a decisive rally above the 1667 resistance level, then the support at 1660 is likely to give in and we should see a move roughly to 1642. Below 1660 my T1 is 1652 and T2 at 1642. Hope this scenario analysis helps you to make more sense of the price action today.

DAX chart 09 16

DAX – Sellers came in at the 13102 threshold level and kept on pushing the market lower throughout the day. As a result, the 12950 low was taken out as expected and the market moved to my downside target level of 12890. Now the market has a key resistance area above it at 12925 – 12950 and stays bearish below it. I said yesterday that we could eventually see a move to 12700 or so if 12950 support is broken. Now it is so the next test is whether the market will keep on selling rallies below the level. Below 12950 my downside target for DAX is 12720. Alternatively, should there be a decisive breakout from the descending trend channel (the channel high is currently at 13030) the market would be likely to rally to the 13200 – 13250 region.

DJ chart 09 16

DJ – The previous day’s low was taken out and resulting in a bearish breakout from a two-day range in DJ. My downside target level at 30520 is valid as long as the market trades below 30875. Alternatively, a decisive rally above the level would indicate the bulls want to test the 31270 level again.

NAS chart 09 16

NAS – Relative strength in Nasdaq changed into weakness as all the main indices traded lower and there was no one to push Nasdaq above the 12170 high (Wednesday’s high). The index has now broken below the 12000 and moved to the 11917 level (and beyond) I indicated yesterday. Nasdaq is bearish below 12000 with the potential to move much lower. Below 12000 my targets are 11720 (T1) and 11570 (T2). Alternatively, a strong move above the 12000 level probably moves the market back to the 12170 resistance.

Macro Drivers for the USD 

As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The Federal ReserveFed hiked the target range again by 75bps (to 2.25%-2.5%). This was the fourth consecutive rate hike. The rate hike was in line with analyst forecasts. The Fed noted that ongoing increases in the target range will be appropriate but the next decisions will be data-dependent.
YieldsThe 10-week range in the US 10-year treasury yield has been from 2.516% to 3.498%. 
EmploymentThe US economy added 258 thousand new jobs. June number was revised from 390K to +384K and the average hourly earnings increased 0.5% (month over month) vs 0.3% predicted by the analysts. Such strong growth in employment and earnings reminds us how strong the US economy still is. 
InflationThe US inflation rate dropped more than expected. The July reading (YoY) came in at 8.5% after a 40-year high of 9.1% prior. Analyst forecasts had put the number at 8.7%. The cost of energy rose 32.9% (vs. 41.6% in June). Lower cost of petrol (44% vs 59.9%), fuel oil (75.6% vs 98.5%) and natural gas (30.5% vs 38.4%) contributed to the decline. The cost of electricity however increased by 15.2%. Food inflation however increased by 10.9% vs 10.4% prior. 

 The Next Main Risk Events

  • USD Prelim UoM Consumer Sentiment
  • USD Prelim UoM Inflation Expectations

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta
Chief Market Analyst

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