Hourly Action In Gold From Trader Dan

Posted at 2:38 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Widespread buying across the entire commodity complex was the order of the day today with the foods leading the charge higher once again. The grains were very strong with wheat charging above $8.60 as it reached its highest level since August 2008. Cotton prices continue to trade just off a 140 year high. Sugar and coffee were both sharply higher today as were the meats. Platinum, palladium and copper were all higher today as well and even crude was able to move north.

That buying lifted gold from off its worst levels as it once again moved down towards support near $1320 and held. Instead of the move lower attracting strong selling, it instead attracted a decent amount of buying. The buying was not enough to push it up significantly on the day but it was enough to reject the lower support level which is a friendly development on the price chart. Momentum to the downside is drying up for now in gold.

It also did not hurt matters any that the HUI was finally higher as that index looks to be sold out for now. They are a decent amount of buyers who are willing to buy the shares down near these levels as from a money management perspective, they have a rather small and well defined downside risk should the trade go south.

One day does not generally flip a market that quickly so how the market acts the rest of this week will be very telling. Still bulls have to be encouraged by the day’s action as the technical indicators are so deeply oversold on the HUI that any signs of stability will turn them to issuing buy signals rather quickly. If nothing else, it will force the bears who have made some pretty good profits on the way down to snatch them before they disappear.

The HUI will need to get above 516 – 517 or so to give us some signs that the low of yesterday is the bottom in this latest reaction. That, or another move lower which can hold above 490 before rebounding will be a good sign.

We will need to watch two things from this point today – first is how the Fed statement on policy is received by the markets at large. Second, whether some of the very big buyers of the physical metal are now going to decide that this is a level to commit to purchases in size. Those guys are trying to read the charts to a certain extent as well in an attempt to determine whether the spec long side liquidation has run its course  and whether they should commit in larger size to planned purchases of the metal. It is only natural for buyers waiting in the wings to see if they can get something cheaper. If they feel that the reaction low is in, they will step in. As long as they believe that there is some further threat of fund long side liquidation, they will be hesitant to come into the market in force.

Monday’s open interest plunge apparently has caught the attention of a large number of these potential and actual buyers as well. The data released by the exchange this morning showed an increase in open interest indicating that we had a decent number of fresh shorts move in yesterday who were hoping for a downside break of $1320 and were salivating at the number of sell stops that were lurking there. The fact that price has not been able to reach those has likely caused some of these fresh shorts to cover.

Gold needs to get back above $1340 in short order to give the bulls a bit more breathing room however as it is not out of woods just yet. Bears are hoping for something in the way of news releases or economic data that will allow them to take out $1320.

Remember that huge rally in the bonds yesterday on the long end? It all disappeared today as this YO-YO continues. It is no longer a market but a gigantic, expensive yo-yo. Bond bears are watching the CCI and thinking in terms of inflation while the Fed comes in and monkeys with long term rates as part of their QE2 program. Up and down, up and down, with rallies being sold and dips being bought. It will continue until we get a convincing breakout one way or the other.

The S&P keeps heading higher as inflation is now fully entrenched in paper assets. Compared to real money – gold – the equity markets are going nowhere as one studies the Dow/Gold ratio or the S&P/Gold ratio. As far as I am concerned there is no difference between what is happening to the US stock markets as there was with Zimbabwe. The path of least resistance continues to be higher as there is so much funny money available courtesy of the Fed, that it is almost impossible for anyone to be short. That is exactly what they want anyhow. The Fed does not want even the slightest whiff of deflation and no doubt their henchmen are ecstatic at the huge rally that they have engineered in the US equity markets. Jam the equity markets higher and consumers see their 401K’s moving up in value and off to the retail outlets and malls they shall run, is the game plan by these scheming financial flim-flam artists.

The Dollar continues its recent bout of weakness as it took out support near 78 on the USDX but like yesterday it has managed to pop back above that critical level. It is trading nearly in identical fashion with gold although today did seem to me to show a bit more of the old link between an inverse move in the Dollar compared to gold. The Dollar chart really concerns me because as of now, there are no signs of bullish divergence in the indicators or anything else that might signal that the move lower is coming to an end. I am watching it carefully to see when it will uncover a definite, defined support level. It looks as it is trying to hold here near 78 but we shall see.

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