Will gold cross the critical line in the sand at 1140

The fallout from yesterday’s Federal Reserve minutes has been swift, and in some cases, dramatic. The market saw the minutes as dovish, prompting Fed Funds futures traders to lower their implied probability of a September rate hike to just 38%, from roughly 50% beforehand. The dollar was the big casualty of the release: the trade-weighted dollar index has fallen back below its 50-day moving average near 96.25 as the yield in the benchmark 10-year bond retreated by 10 bps to 2.10%. Interestingly, US stocks, which would theoretically be expected to rally on continued low interest rates, fell nearly 1% yesterday and futures are currently pointing to another big bearish gap today.

So what market has actually benefitted from yesterday’s Fed minutes? The biggest beneficiary has been beleaguered gold market. The price of the yellow metal has surged over 20 points from yesterday’s low and has now quietly rallied 60 points from its early August lows near $1080. Bulls hope that, at long last, the precious metal is returning to its position as a global safe haven and an alternative currency that could gain if the so-called “currency war” accelerates, while bears argue that the recent rally is just a short squeeze within the context of a longer-term bearish trend. So who’s right?

As always, traders should let price action be their guide. As of writing, the metal is testing a critically important resistance level at 1140, which represents both the 50-day moving average and, more importantly, a major previous-support-turned-resistance level from late 2014 and early 2015. As long as gold remains below this level on a closing basis, the near-term outlook remains bearish.

That said, there are some possible signs that gold bulls could overcome that key hurdle. Beyond the aforementioned dollar weakness, gold also put in a big Bullish Marubozu* candle yesterday, signaling strong buying pressure and hinting at a possible continuation. Further bolstering the bullish case for gold, the MACD indicator has turned sharply higher and is on the verge of crossing back above the “0” level, and the Slow Stochastics indicator has reached overbought territory on the back of the recent rally, though the more conservative RSI indicator (not shown) has not yet crossed that threshold, suggesting that the metal could still rally further before losing steam.

If gold bulls are able to break through the barrier at 1140, then a more substantial rally toward 1160 or 1180 is possible in the near-term. That said, the longer-term series of lower lows and lower highs would remain intact all the way up to 1200, so bulls should be cautious about getting too excited as long as the metal trades with an “11” handle.

* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.

Source: City Index