Golden opportunity?
03/23/18

Gold futures have mostly done a whole lot of nothing since rallying $120-plus from December 12 to January 25—likely frustrating trend-followers, but putting smiles on the faces of options strangle sellers and short-term swing traders.

The daily chart below shows that since tagging its contract high around $1,370 earlier this year, April gold futures (GCJ8) have zig-zagged lower, three times making swing lows in a general support/resistance zone that contains swing highs from October and November, along with the late-December and early-January lows.

April gold futures (GCM8) 7/5/17–3/22/18. Daily gold price chart support zone

Source: OptionsHouse

This zone also represents an approximately 50% retracement of the December-January rally, a level (around $1,307) most recently tested on March 20—the day before gold spiked higher after the Fed announced it was raising interest rates, and expected to hike them two more times (possibly three) this year.

And although Wednesday’s Fed announcement gave no indication the central bank was fretting about runaway inflation, the “I-word” has pushed itself to the front of the market’s consciousness. Inflationary environments are generally seen as bad for the stock market and good for gold. Stocks closed lower on Wednesday, and even though gold retreated from its post-announcement intraday high, it still closed in the green and followed through to the upside again yesterday while equities pushed lower.

So, let’s go through a little checklist:

●Gold futures have tested and bounced off a major technical support level for the third time since February.

●Gold declined from yesterday’s high but still closed up and maintained prices in the upper portion of Wednesday’s range.

●Gold often rallies after rate increases.1 Coincidentally, gold’s most recent up move—the December-January rally—kicked into gear the day of the Fed’s last interest rate hike on December 13. Gold also turned higher after the March 2017 rate hike (but not the June 2017 hike).

A counter argument is evident in the following chart (with price ladder, right), which underscores the fact that other big up days over the past several weeks have come within a day or two of marking gold’s recent swing highs.

But gold is currently trading within clearly defined technical boundaries. A near-term move (say, one or two closes) above Wednesday’s high could indicate the market is departing from its recent pattern of retreating quickly after big up days. On the downside, puncturing the now-established support zone lows could trigger stops and embolden the bears.

April gold futures (GCM8) 1/5/18–3/22/18. Daily gold price chart and price ladder.

Source: OptionsHouse

So even if gold keeps frustrating long-term trend followers, it looks like it could continue to offer opportunities for short-term traders.

Market Movers Updates: Against a backdrop of relative strength in utility stocks, American Electric Power (AEP) gained more than 1% yesterday, reversing a two-day pullback and pushing the stock back to its resistance/breakout level.

Crude oil broke out of its consolidation in dramatic fashion, with the June WTI crude futures (CLM8) trading up to their January highs around $65.50 on Wednesday before closing lower yesterday.

 

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1 MarketWatch. Gold extends post-Fed advance as dollar churns. 3/22/18.