Hourly Action In Gold From Trader Dan

Posted at 2:06 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Apparently the catalyst for the strong move higher in gold today was a speech given by Chairman Bernanke in front of the National Press Club this morning. Basically he repeated what we have been saying for what seems like an eternity now – in spite of all the QE and gazillions in liquidity created by those programs, job growth remains anemic:

“It will be several years before the unemployment rate has returned to a more normal level,”

Traders rightly interpreted that to mean QE is still on for the immediate future.

Here is an excerpt from Bloomberg on the story detailing Bernanke’s comments. Click here to read the entire story…

Little Alarm

Fed policy makers are showing little alarm over the rise in food and energy prices. The central bank’s Jan. 26 statement acknowledged rising commodity prices while saying that longer- term inflation expectations were stable and “underlying inflation” was still on the decline.

While prices of some “highly visible” items such as gasoline have “significantly” increased recently, “overall inflation remains quite low” and wage growth has slowed, Bernanke said. “These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy,” Bernanke said.

I am not sure what planet Ben is on but maybe he should take a quick peek at the CCI chart (Continuous Commodity Index) and say that with a straight face. He may be “showing little alarm” but rest assured many of us are showing a great deal of alarm including every person in the US that has an unfortunate habit called eating. This is not to even make mention of the fact that we have governments being toppled on account of soaring food prices. In spite of all the years of watching Central Bankers spin, dodge, weave, obfuscate and outright deceive, I still marvel at their temerity when dealing with the fruits of their own creation.

Back to gold however – an important occurrence took place yesterday.

Open interest finally stopped declining according to the data released by the exchange this morning. Although the increase was minimal, it stopped going down and that is what is so significant. It sure looks as if the wholesale long side liquidation has come to an end. Based on the price action today, that appears to have now been confirmed. Keep in mind we are down to levels of overall hedge fund net long-side exposure last seen when gold was trading at $920. There is no froth whatsoever left in the gold market and without that froth, there is insufficient selling available to take the market lower. That requires more long liquidation and the shorts are not getting any more of it.

Three things occurred technically with today’s nice upside move. The first is that gold has broken out of the coiling pattern shown on the chart to the upside, a bullish development. Secondly, it has now gotten firmly back above the 10 day moving average. As a matter of fact, it ran exactly to the 20 day moving average which served as today’s high. Thirdly, it has also managed to push through a horizontal resistance level near $1350.

The next test for the gold bulls will be whether or not they can recapture $1365. If the bulls can close the market near today’s level or higher tomorrow, they will have pulled off quite a feat for they will have prevented confirming a head and shoulders top pattern on the weekly chart and have sprung a major bear trap.

Further helping matters along is the fact that the HUI went against the tide of a flat to weaker general equities market and moved strongly higher. While it is only Thursday, the developing weekly chart pattern shows a picture of an index that has run towards the 40 week moving average and had a strong bounce up and away from that level. If the HUI could extend today’s gains in tomorrow’s session and close above 530, it would have generated a very nice upside reversal pattern on that chart.

On the daily chart the index has pushed through both the 10 day and the 20 day moving averages and has now turned the shorter 10 day upwards after a decline in that average that has lasted for a solid month. That turns the short term chart pattern back to friendly once again. Now, for the intermediate to turn friendly, the HUI needs to clear the downtrending 40 and 50 day moving averages coming in near 541 and 545 respectively.

The Dollar was higher today which seemed to engender some broader selling in some of the commodity markets. Not sure what all that was about but for the time being it looks more like a bounce in a bear market  with the dollar perhaps trying to put in a short term bottom here. We’ll keep an eye on that.

Bonds moved lower which is a bit of a surprise to me given the general overall tenor of Bernanke’s speech, which I certainly did not view as all that bullish for the economy. As is the case yesterday, they are flirting dangerously close with an important chart support level.

Click either chart to enlarge in PDF format with commentary from Trader Dan Norcini