Gold futures have reclaimed $4,000 following the US midterms, raising the prospect of an important swing low. With a bullish engulfing week taking shape, improving options sentiment and favourable seasonality, the technical picture is becoming increasingly interesting for gold bulls.
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Gold’s $4,000 Rebound Gains Support from Seasonality and Sentiment
The Democrats’ blue sweep in the midterms weighed on US yields and the dollar on Thursday, helping gold futures rebound above $4,000. A sharp sell-off in crude oil also eased inflation concerns, allowing gold to rally alongside equities during the risk-on rebound. And the conviction behind the move suggests an important swing low could be in play.
My previous assumption that bulls were quietly accumulating above $4,000 was certainly put to the test, but perhaps that was the final washout of weak hands. Besides, futures traders remain net-long, while risk reversals are curling higher to show a pickup in demand for calls relative to puts. And with gold on track for a bullish engulfing week, the technical picture is becoming increasingly interesting. Particularly with seasonality on its side this time of the year.
Could Gold’s Seasonality Favours a November Rebound?
- Since the year 2000, average returns for gold in November have been 1.3%, and it has closed higher 57.7% of the time. Of those bullish months, gold has printed an average return of 4.7%.
- Negative returns during November have averaged -3.4%, and it has closed lower 43.3% of the time.
- Median returns have been less impressive at 0.5%, though still positive regardless
- Also note that the win rate increases to 65.4% in December
Given we have seen a decent selloff on gold and potential false break of support, bullish seasonality may help gold bounce over the near term. Though a break of this week’s low provides a clear line in the sane for bulls.
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Gold Futures Eye a Bullish Weekly Reversal
The weekly chart shows gold futures are on track for a bullish engulfing week, having opened at the low and now trading at the weekly high. Should gold rally into Friday's close, it could form a bullish Marubozu – a long bullish candle with little to no wicks.
COT Positioning and Risk Reversals Hint at Improving Sentiment
Note that the most recent futures positioning from the Commitments of Traders (COT) report shows traders remained net-long overall, though their gross longs have been trending lower since July. However, gross shorts have flatlined for the past three weeks, and the rebound may have forced some bears to cover and encouraged sidelined bulls to return.
While risk reversals remain negative – meaning puts continue to command a premium over calls – they are curling higher to show sentiment is becoming less bearish. And with a potential bullish engulfing candle marking a false break of support, perhaps gold can find a bullish tailwind in the coming weeks.
Gold Bulls Eye $4,142 and $4,185 Resistance
The daily chart shows Thursday's gold rally was accompanied by strong volume. Prices have risen above $4,100 during Asian trade, though bullish momentum may already be waning. Bulls may therefore be seeking a pullback closer to $4,000 or the broken trendline, with a view to initially targeting the weekly VPOC at $4,142, followed by the high-volume node and October VPOC around $4,185.
