Gold Pulls Back – Pause or Top?

Gold Talking Points:

• The parabolic move in gold has finally calmed a bit as prices have pulled back over the past two days.
• At this point, it’s too early to call for a top as the pullback has been limited and prices haven’t even dropped down for a test of prior resistance at $3700.
• USD is rallying and US rates are pushing higher since the FOMC meeting, but that doesn’t necessarily preclude continued gains in gold, as last year’s Fed rate cuts brought a similar dynamic in rates and the USD, and gold continued to trend into the US Presidential election.

With a move as hot as what’s shown in gold over the past month and to larger degree, over the past seventeen months, there’s naturally going to be a contrarian part of the crowd looking to get bearish. There are overbought readings on several time frames and it can make sense to try to look for a bit of reversion, as a one-sided market will face a higher and higher bar to continued gains as more and more of the market gets on the long side of the move.

But that doesn’t necessarily speak to timing, and as the old saying goes, markets can remain ‘irrational’ far longer than an individual trader can remain solvent. That definition of irrationality will differ amongst market participants, of course, but the one thing that’s clear in gold as that ever since the Fed was pushing for rate cuts even amidst a strong inflationary backdrop, with a peculiar comment from Austan Goolsbee back in February of last year, there’s been a strong directional push in gold prices; and the only respite that’s shown has been two bull pennants, one for two months and another for four, as gold prices have gained almost 90% over that span of time.

The most recent bull pennant in gold had held into last month. It was a comment from FOMC Chair Jerome Powell at Jackson Hole that brought the trend back to life, allowing for a  parabolic move that’s only paused briefly at the 3654 and 3700 levels.

Gold Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

Gold Strategy

I talked about this ahead of the rate cut, but when dealing with a massively overbought move the trader’s option set isn’t great:  It’s either to chase the move and run the risk of a sloppy entry leading to a triggered stop, or to try to be patient and wait for a pullback to support, which also means running the risk of missing an entry. I think many experienced traders would prefer the latter to the former, however, as missing an opportunity cost isn’t as financially costly as eating stops.

But on that front of pullback potential, there’s a few different ways that one can move forward. One such mechanism is to use a lower time frame, which would be somewhat of a blend of the two above options as this would still entail chasing an overbought trend on longer time frames; but at the very least it could offer some scope for risk management as it would also be looking to work with shorter-term pullbacks to support that could allow for more concentrated risk management.

This would be similar to the setup I had looked at in the webinar back in May, when Gold had found resistance at $3500/oz and had started to pullback more aggressively. There was a support test at an area of prior resistance which, ultimately, turned out to be a swing low that led into another test of the $3400 level.

The challenge now is that gold is still very near the highs that were set on Tuesday which is an extension of that move that showed up after Powell’s speech at Jackson Hole. The four-hour chart in gold is currently showing a possible bull flag formation, and there’s been a test and hold of higher-low supports since yesterday afternoon. This would be an aggressive way of tracking the trend, and if this support structure does not hold, there’s another area of interest for such down at the $3700 psychological level.

Gold Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist