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Gold Technicals – COT shows more bulls as price rebounds

Is the Gold sell-off over? Prices started 2 weeks ago at 1,590 per troy ounce, and reached close to 1,320 last week. That is a 270 USD drop per ounce of gold traded, around 17% decline from peak to trough. However, price has since recovered significantly, gaining back more than 100 USD from the low and trade to a recent swing high of 1,425 USD. The questions we are all asking is this – is this a bull trap or a signal that bullish reversal is underway?

Hourly Chart

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Looking at Hourly Chart, the argument for a bullish reversal can be established. Prices have been posting higher highs and higher lows, and the sequence hasn’t been broken. The recent correction lower has also failed to breach into the previous consolidation range, which suggest that current bullish sentiment is still strong. Currently Stoch readings are inside the Overbought region, and suggest that a bear cycle may occur just as prices head into the previous swing high once more. If price is able to break into new highs even with such Stoch readings would underline the bullish sentiment that Gold is currently enjoying. A strong bullish scenario would see price breaking beyond 1,425, with the subsequent bear cycle unable to break back below the 1,425, allowing price to rally and push for new highs when Stoch readings form an interim trough.If price is unable to breach 1,425, 1,400 will open up as a potential bearish target once more, however this does not negate current recovery efforts as long as price levels maintain above the recent swing low.

Weekly Chart

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Bulls may need to do much more to shift to a bullish bias on the weekly chart. Price appears to have merely bounced off the 1,330 support and is currently kept below the 1,430 support turned resistance. Stochastic readings is optimistic though, with readings appearing to form an interim trough which may help to propel price higher towards the next resistance around 1,475.

Commitment of Traders

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Looking at the COT data, it seems that non-commercial holdings has actually increased, not decreased despite the huge sell-off. Non-commerical holdings refer to financial institutions such as your banks and funds, and it is very interesting to see that “smart money” is actually buying up Gold at lower prices when everybody else is selling. Reports that funds have been clearing gold last week might have been over exaggerated, as it is clear that institutions end up being the net buyers of gold after the dust has settled.

What does this mean? Well, generally price has a very nice correlation with COT net non-commercial positioning. Note that as institutional holdings increases, Gold price rallied and the reverse happened when positions pushed lower. This is not saying that price will definitely bounce higher from here, but it is just a showcase that financial institutions seldom get it wrong. However it is also worth noting that institutions tended to have longer holding power than your average speculator, and hence averaging down is a possible trading strategy for them. The possibility for prices to continue sliding lower remains there, and conservative traders may wish to wait for further confirmation of price recovery in tandem with net-long positions moving above the high 4 weeks ago to prevent getting caught in a potential bull trap.

More Links:
AUD/USD – Struggling to Hold on to 1.03 [1]
Week in FX Asia – Yen Continues Fall as G20 Issues no Objection to Japan [2]
EUR/USD – Settles Around 1.3050 [3]

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Mingze Wu

Mingze Wu [8]

Currency Analyst at Market Pulse [9]
Based in Singapore, Mingze Wu focuses on trading strategies and technical and fundamental analysis of major currency pairs. He has extensive trading experience across different asset classes and is well-versed in global market fundamentals. In addition to contributing articles to MarketPulseFX, Mingze centers on forex and macro-economic trends impacting the Asia Pacific region.
Mingze Wu
Mingze Wu

+Mingze Wu [12]