Gold tumbles, traders eye chart

08/12/20
  • Gold suffered its biggest one-day loss since March on Tuesday
  • Futures fell more than $100 on the day
  • Sell-off came two days after market’s latest record high

If Friday’s intraday reversal to the downside and Monday’s follow-through decline were a bit on the ambiguous side, yesterday left no doubt: Gold is in a pullback.

After a five-month, 42% rally that last week pushed the yellow metal above $2,000/ounce for the first time in history, October gold futures (GCVO) tumbled more than 5% intraday yesterday, definitively breaking the short-term rally (the most recent leg of the larger March–August uptrend) that kicked in on July 21:

Chart 1: October gold futures (GCV0), 7/16/20–8/11/20. Gold futures price chart. Biggest down day since March.

Source: Power E*TRADE


The recent rally was a high-momentum, headline-dominating move in a market that hadn’t experienced a significant downturn since March—and one that some traders would argue was overdue for a reset, especially after an apparent rush of “fast money” since late March as it banged out new record highs.

Traders who think the market’s long-term uptrend isn’t over (especially those who have missed out on it so far) could be watching a few key price levels in coming days and weeks. The following chart highlights a few of the potential support levels/downside targets chart-oriented gold bulls may have in their sights—somewhere between the extremes of “the pullback is already over” and “gold is in the process of starting a long-term downtrend” (both of which are, of course, possible). They all reflect basic technical principles of prices testing notable past highs, lows, and consolidations:

Chart 2: October gold futures (GCV0), 3/12/20–8/11/20. Gold futures price chart. Pullback possibilities.

Source: Power E*TRADE


Starting at the top:

1. A test of the longer-term trendline. This is the most basic, and conservative, target—and, some technicians would say, the least relevant, since typical trendlines are subjective and tend to need adjusting over time. (In other words, they can be moving targets even in the best of circumstances.)

2. A pullback to test the July 21 breakout above the early-July highs. Fibonacci traders will no doubt notice this level also coincides with the 38.2% Fibonacci retracement level of the March–August rally.

3. 50% retracement level/top of April–June consolidation. The 50% retracement level is in the vicinity of the swing highs that formed the top of the April–June trading range.

4. Trading range bottom/61.8% retracement level. Another case where a support level (defined by the April–June swing lows) is in the same general area as a major Fib retracement.

Aside from the time-honored principle that these types of technical targets should be thought of as approximate zones rather than precise price points, many traders who use them operate with the view that they represent levels at which prices may reverse, either temporarily or on a longer-term basis (which means in addition to buyers looking for potential entry points, shorts may use them as profit-taking targets).

The corollary is that if prices break through one of them decisively, a test of the next level may be in store. In fast-moving conditions, it always helps to know where a market may potentially throw up stop lights.

Market Mover Update: Synchrony Financial (SYF) followed through on Monday’s upside breakout with a 6%-plus intraday rally yesterday.

Both Laboratory Corporation of America (LH) and Green Dot (GDOT) pulled back nearly 10% in the wake of their recent earnings releases.

Why wait? The S&P 500 (SPX) came within 12.5 points (0.4%) of hitting a new all-time high yesterday before closing lower. The party hats and Champagne could roll out tomorrow (or next week, or next month, or…), but let’s just get things over with and give the index credit for erasing 99% of its February–March sell-off.

Today’s numbers (all times ET): Mortgage Applications (7 a.m.), Consumer Price Index, CPI (8:30 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Jumia Technologies (JMIA), ZTO Express (ZTO), SpartanNash (SPTN), Cisco Systems (CSCO), Revolve (RVLV), Macy's (M), LYFT (LYFT), Lemonade (LMND).

 

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