February 28, 2019
The pullback from 1350 continues, and now we have broken the prior lows at 1323/24. More importantly, we have broken and closed below the parabola that Gold has been in since the August low. Absent a backtest of that support, this suggests a test of support at ~1313, the prior low of 1305, or 1300 below there.
Gold has corrected its overbought condition now that the daily RSI is back to 54, closer to the neutral level of 50. The MACD Histogram has also fallen below zero. Gold is also no longer as extreme bullish as it was last week, when it hit a peak of 90% bullishness per the Daily Sentiment Index, or DSI. It is now down to 72 but could still fall further.
There are still several problems from a technical perspective, in my opinion. The daily MACD Line remains elevated. In order to test and break critical resistance, the 2016 high of 1377, we need to gather up enough energy to do so. I would prefer a MACD Line closer to the zero or lower as a starting point for a move up to test and break 1377.
The weekly RSI has fallen back from 71, its highest level since 2011, but is still high at 66. The weekly MACD Line remains at its highest level since the peak in July 2016.
With that said, there are four possible scenarios that could play out going forward:
- We go up to test 1360s/70s from here, set a negatively divergent higher high, then fall to 1300-05 or likely below.
- We have broken and closed below the parabola, which suggests a test of 1300-1308 next. We hold there and go up to a negatively divergent higher high, and then fall to sub 1300 perhaps as far as 1220, but at least the 200D MA ~1250/51.
- We go straight down from here, setting lower highs and lower lows until we hit bottom.
- We go straight up and break 1377 and head up the 1400s next.
Starting with the last first. I don’t believe that is possible yet, given that we have not reset the technicals, sentiment, and positioning yet to such a degree that we can break 1377, in my opinion.
Any of the first three could play out next, but what they all have in common is that we’re going lower. Different routes, same destination: down, but only in the short-term.
By way of reminder, this is what many of us, including myself, have been waiting for. A reversal in Gold prices to enable us to buy on the dip for the coming breakout on the upside. Such a pullback is healthy and indeed necessary for Gold to be able to take out 1377, especially following a near $200 rally off of the August low.
I still believe we are going to take out the 2016 high following this much-needed dip. Why? At the risk of repeating myself, I expect stocks to fall again and force the Fed to actually reverse policy to rate cuts and QE. The Fed would not be prepping us for such an outcome almost weekly now if it were not going to happen. This is their modus operandi. Once it becomes clear that stocks are not going to stop falling without such a policy reversal, Gold will begin to take off and break the 1377 barrier to the upside.
“When” is open to debate, but stocks could begin to dump again next month, as late as October, or sometime in between. Either way, it’s only a matter of time. A return to QE is inevitable, in my opinion. It’s clear now that the stock market cannot survive without increasing levels of liquidity. Nor can bond yields remain low for much longer either, given the rising disequilibrium between soaring supply and falling demand. QE solves both problems, but will likely mean the peak and fall of the dollar and the rise in Gold to new heights.