Gold Price Outlook: Speed Bump Seems Unlikely to Deter Dip Mentality

Throughout July, I had been noting the repeated failed attempts from gold bears to sustain a break below 4,000. And when a level won’t budge, the market has a tendency to eventually go the other way.

Last Tuesday, August 4, I outlined a case for a breakout, arguing that price action, options pricing and futures sentiment all hinted at quiet accumulation. Maybe I got lucky with the timing, but the breakout on August 5 was spectacular, to say the least, with gold rising 5% to mark its best day since February and its second-best day in ten years.

While I suspect gold bulls have more planned, price action on Thursday shows prices have wobbled at their cycle high, hinting at the first bump in the road.

 

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Gold Wobbles, but ‘Dip’ Mentality Could Remain

The daily chart shows a solid rally from 4,000 support, although resistance was met around a prior weekly VPOC (volume point of control), just below 4,500. A bearish outside day engulfed Tuesday’s small doji and Wednesday’s small bullish candle, but so far, support has held around 4,400, close to the weekly VPOC at 4,404.

A break beneath this area would bring the 200-day EMA into focus near 4,300, along with the lower end of the recent trading range. If we see bears take full control, the next level they could potentially target is around 4,200, near the recent range lows.

However, given the strength of the bullish range expansion after a prolonged period of consolidation above 4,000, my bias remains for a move towards 4,700, with 4,600 likely to provide interim resistance along the way should the rally continue. Moreover, futures and options sentiment also appears supportive of a “buy the dip” mentality among gold bulls, some of whom may be frustrated at having missed the initial burst higher.

Source: COMEX, TradingView

 

 

Gold Price Outlook: Futures Positioning and Options Signals

Gold Futures (GC) Positioning | COT Report

Net-long exposure has continued to trend higher to gold futures, among large speculators and managed funds managers. Recent data from the weekly Commitment of Traders (COT) report shows funds had a net-long exposure of 131k contracts, their most bullish level in more than six months. Large specs pushed their net-long exposure to a 6-month high just shy of 200k. While gross-longs have been trending gradually higher, it is the collapse of short bets that helped propel net-longs in recent weeks. And I suspect that will continue to be a supporting feature for higher gold prices, with a lack of bearish interest for now.

 

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Gold Options Positioning Signals Cautious Bullishness

Two of the three risk reversals I track had flipped into positive territory last week, for the first time since mid-April. This showed that demand for calls outnumbers demand for puts. But we also saw the risk reversals accelerate from low levels ahead of the breakout to show options traders quickly moving away from downside protection relative to bullish bets. The fact it has dipped to negative territory this week is not enough to call for a major swing high in my books, but it does back up the potential for a minor pullback over the near term

Source: ICE, TradingView

 

 

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge