Dear CIGAs,

Yesterday’s retreat from technical chart resistance near $1170 induced some light long liquidation and some fresh short selling in gold during today’s session. A bit of stability in the US Dollar and long liquidation in the crude oil market added to the strength of the bear’s position in today’s battle over the yellow metal. It did not help matters any seeing the HUI moving lower as well.

Reasons for selling in gold were cited as fading concerns over the plight of Greece which undercut bullion buying across the Atlantic as Greek bonds sales seemed to have been reasonably successful now that the aid package is providing reassurance for nervous investors. Still, it must be kept in mind that sovereign debt concerns do not disappear overnight. Greece’s problems are emblematic of not only other nations in the Euro zone but also many individual states here in the US – it spent too much money for too long and ran itself hopelessly into debt. No bailout package is going to deal with the underlying issues that led to the crisis in the first place. I said all this merely to emphasize that gold will continue to be well supported on these dips in price. Those fundamental issues remain solidly in place. However, from a purely technical perspective, when you get a run up in price of some $90 in three week’s time, a setback is not unexpected particularly after a technical chart resistance level could not be taken out.

The bullion banks are not running as some are suggesting as evidenced by the continued rise in open interest during the price ascent but are instead selling into the influx of managed money flows. Only when we see a fall off in open interest during a price rise will it be able to be correctly argued that they are being squeezed out. We will be on the alert for that.

In the meantime gold has dropped down into the first level of chart support noted on yesterday’s and today’s chart and was able to attract some buying there. There is stronger support near the $1130 level should dip buying be unable to push it back up from $1,145 and into the lap on the chart above today’s session high and yesterday’s closing price ($1,158 – $1,162). That will be the first order for the bulls. Should they be able to pull that off and take price back up above $1165 within the next day or so, it will be a display of quite remarkable internal strength in the market. That would indeed spark some strong short covering were it to occur.

Price is remaining above the rising 10 day moving average which is a plus for the near term. All of the moving averages are trending upwards.

The broader equity markets are having some difficulty at current levels (1200 in the S&P) as some technical indicators are signaling a loss of upside momentum. This market is so richly valued and has priced in near flawless earnings that companies had better perform and at the very least, meet expectations, or we are going to see a sharp sell off in there. Alcoa’s report was a warning shot across the bow of the bull ship. Whether it gets heeded is another matter entirely. This market has not been kind to shorts the last two months.

The weakness in the broader equity markets probably exaggerated the selling in the HUI today. It did manage to find buyers at the session low which is where the rising 10 day moving average came in today. Some of the short term technical indicators are rolling over on the daily chart but the weekly charts still have those same indicators in a bullish posture. That should work to bring in buying as long as those longer term indicators stay friendly.

Bonds look like they ran into technical chart resistance near the 40 day moving average. Today’s range was sandwiched between that and the 20 day on the downside. They appear to be at a crossroads here so the action tomorrow will be a key as to which way they are most likely headed.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini