Hourly Action In Gold From Trader Dan

Posted at 3:59 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

The start of a full week of trading in the New Year brought back the full complement of traders and with them the usual selling pressure emerged precisely at 2:00 AM, CST as London opened for business. The Euro was immediately violated and with its assault, the Dollar went the other way, namely straight up. Of course the usual gold selling gang wasted no time in attacking the yellow metal as it was pummeled $15. From that point it was nowhere but down as trading moved into New York where it received another mugging as all of the gains produced in the thinly-traded holiday markets of last year were wiped out. As I mentioned last week, low volume price action must always be suspect – it is simply too easy for a few, well-timed big orders to push  a holiday market in any direction one wants it to go.

Today’s downdraft has taken gold back under the 10 day moving average which has now turned lower. Gold is still trading above the 20 day moving average and the longer term moving averages are still trending upwards so technically the market is bullish although the recent price action has left a somewhat negative short term chart formation that gold will have to deal with. It should be noted that once again the buy recommendation of a well known newsletter writer has proved to be the kiss of death for any gold rally. It is amazing to me how uncannily accurate in an inverse manner this writer has been when it comes to gold. Buy recommendations mean gold sells off and sell recommendations means that gold is getting ready to rally. Fading his actions has proven to be quite profitable for astute gold traders.

Support near the $850 level gave way early in today’s session before buying showed up in sufficient size to push the market away from that zone. This initial support did hold but barely.  The next level of support should $850 give way, and one that gold must hold in order to keep the technicals friendly, is the $830 level. Two consecutive closes below that level and a short term top will be in (at least for gold priced in Dollar terms). Resistance still lies at the very stubborn $880 level. It is obvious that a seller/sellers of size are making a stand there – we all know who that is by now.

Again – at the risk of beating a dead horse- the only way to beat that crowd is to remove the metal from the Comex warehouses. Players of size must understand that they cannot win the paper game at the Comex unless they deprive the paper shorts of sufficient metal backing to make them vulnerable to delivery pressures. Along that line only 3 deliveries were assigned in the January this morning bringing this month’s total to 1,156 contracts or 115,600 ounces. January is a very thinly traded contract month so the bulk of any strategy to take gold in size will probably have to be relegated to the February as this month winds down. Those who intend to do so should use any selling pressure provided by the bullion banks, such as what we have seen today, as an opportunity to put on fresh longs with the intent to acquire the physical metal at a discount.

We had just begun to see an increase in the open interest in gold which now means that all of the brand new longs from the last week are under water and losing money on their positions. Some of the shorter term oriented guys were stopped out today and might even have gone short. The funds will maintain the bulk of their longs as long as moving average support is not violated.

There was a great deal of chatter this morning that the US Dollar was moving higher on details of the proposed economic stimulus by the incoming Obama administration which added some tax cuts to the package in order to attract some Republican support. The thinking is that a combination of spending and tax cuts will help the US to come out of its economic funk sooner than other countries which have also been afflicted by the spreading recessionary virus. That remains to be seen but for today that is the current “wisdom”. One thing is certain in these goofy modern markets – today’s wisdom is more often than not seen as foolishness in hindsight. It is necessary to keep in mind that the hedge funds that plague today’s markets are the antithesis of wisdom – their trading skills consist of playing Pac-Man with whatever unfortunate market they happen to hone in on.

Interestingly enough, all of the commodity currencies ( the Australian, New Zealand and Canadian Dollar) were trading higher against the US Dollar this morning. I am not sure what to make of that just yet but it bears watching. It could very well be that some players are sensing a bottom in the commodity complex. If that is indeed the case, and I believe it certainly is for the grain complex, then gold will benefit. The platinum group of metals has negative macroeconomic factors to deal with as does copper so if those two metal groups can forge a definitive bottom, it will be quite friendly for the entire commodity sector. Let’s just watch and see how this goes.

The mining sector was knocked lower today in the face of paper gold weakness but the HUI and the XAU have recovered off of their worst session levels as the broader US markets moved higher and into positive territory. There are some signs of bearish divergence on some of the technical indicators for the HUI and XAU daily charts although both indices remain well above their 50 day and 100 day moving averages. One could make the case for a POTENTIAL double top in the HUI near the 309-311 level but that would only be confirmed were the HUI to close below the 260 level. That level also closely corresponds to the 100 day moving average which should garner buying support if this sector is indeed going to sustain its uptrend into early 2009.

Crude oil moved further away from its chart lows this morning as a combination of geopolitical tensions from Israel/Gaza/, Russian idiotic shenanigans with their energy sources and further disruptions to Nigerian crude production as nine workers on a rig were taken hostage all served to garner speculative buying in that pit. Call me a bit skeptical still on the crude rally as I want to see further confirmation before I would feel comfortable saying that a longer term bottom is in this market. Technically the charts are improving but the $50 level is pretty significant technical resistance so until that is broken I am a doubter. I can see a consolidative type of trade in crude where it finds support down in the low $40’s to upper $30’s but as far as a new bullish uptrend goes, given the current recessionary environment, it will take geopolitical events to drive it higher. It should be noted that crude’s strength this morning helped to pull gold off of its worst levels of the session.

One more point to note – there is talk about rebalancing of commodity indices which will bear watching as that will have an impact on gold should rumors be proven true.

The bonds are looking more and more like a top is in. They have broken down below both the 10 and 20 day moving averages with both of those also now turning lower. Should they give way at the 40 day moving average near the 130^20 level, chances are that the lows are in for yields. I expect the funds to put up a fight at that level to defend their longs.

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