-- Posted Thursday, 8 July 2010 | | Source: GoldSeek.com
As I see it the next big upcoming event in gold is whether or not market psychology stays in place to support gold prices given the sudden rally in stock indices yesterday and the continued rally in the Eurocurrency.
The Eurozone is currently in the process of releasing specific details about its upcoming “Bank Stress Test Standards” that a total of 91 Eurozone banks are to be tested by. The list does include some of the Spanish Cajas and German Landesbanks that are banks the marketplace has been concerned about. Rumor has it that part of the test standard will be to require the banks being tested to discount, for testing purpose, Greek debt the bank holds by 16-17% and Spanish debt by 3%. Whether this discount is an appropriate amount is not the immediate issue. Rather, the acknowledgement that the debt is being discounted is.
I do not believe that the standards set by the Eurozone will be set so strict as to not encourage a favorable report result. My belief is that the goal here is to convince the world that the majority of Eurozone banks are credible institutions. The US set the path for Europe to follow a while back. We’ve seen US bank failures, both large and small but we’ve kept our banking system afloat. I expect results of the upcoming Eurozone test to do have the same goal in mind for the Eurozone. Therefore even before the tests begin my expectation is for the result to initially add to, not take away support from the Eurozone. Given that I believe that financial markets to a degree discount the future, it would not surprise me to see the market factor a large part of the test well before the actual test results are known.
The IMF raised its global 2010 GDP forecast from 4.2% to 4.6%. China is floating ideas that at this point they prefer to see financial growth rather than financial restraint. This could open the door for even more, not less stimulus in the US.
Technically speaking, gold prices in July have already broken threw the month of June’s low. This is not bullish price action. If June’s high were to be taken out that would technically speaking quickly change the chart pattern back to being bullish. The problem in waiting for that to happen is that that’s nearly $80 away from yesterday’s low, which in and of itself is as major price move.
If you’re bearish, current price action requires waiting on the sidelines until rallies offsets gold’s oversold Slow Stochastic reading or wait to see if Stochastics embed and reinforce another bear leg down. Either way, you should be watching, not anticipating.
Below is a Daily Chart of June Gold. Each individual bar on the chart represents one day of trading. In “red” I have plotted the 18-Day Moving Average of Closing Prices, in “dark blue” the Swingline Study and the “black dashed line” is the Bollinger Band Study.
The dark blue line on the chart below is the Swingline Study which is a technical tool I developed to help define what the trend is as displayed by this indicator and what the Dollar risk is as the Swingline Study defines it. At this time the Swingline Study is bearish. Current rally highs are lower than previous rally highs and current break lows are lower than previous break lows. That is the definition of a downtrend.
Prices are trading under the 18-Day Moving Average of Closes, which confirms the Swingline bearishness.
Stochastics at this time are oversold. Therefore downside momentum is at work, but is at a critical junction. In order to gain more downside momentum both the “K” reading of 13.23 and “D” reading of 23.29 must both get under 20 for a few days. So far this hasn’t occurred so the market is called oversold.
What seems to be technically supporting the market on price breaks is the Bollinger Band. Since July 1st, gold has flirted with hitting and attempting to rally off price breaks each time the lower band is hit. At the same time, prices are working lower and the band is working lower. This is what I term bearish action that may come to an end when the Swingline gets over gold’s most current previous rally high which on this chart is at 1215.1.
It’s important to keep in mind that even if the last Swingline high of 1215.1 were taken out, prices in doing so would still be under the 18-Day Moving Average of Closing Prices which means at “best” the downtrend would be neutralized, but an uptrend would not have begun.
The weekly chart portrays a very different chart picture from that of the daily chart.
Last week I pointed out that weekly chart remained in the bull camp, but unlike last week, the Slow Stochastic Study lost its embedded status. I have found over the years that when this occurs a move down towards or to the 18-Week Moving Average of Closes often ensues. That is what is taking place now and leads me to believe support will be seen at 11808.8.
The most recent Swingline Study low remains at 1166.8, the same as last week. As long as that is not broken, the pattern of higher highs and higher lows remains in place.
The bottom graph on the above chart displays the Slow Stochastic Study, which is no longer embedded. The embedded status was lost when the “K” reading, displayed as the red line closed under 80. Even the “D” line is under 80 today which to me implies more sideways to lower price action is in the cards.
Not a lot has changed since my last update. A week ago I expected to see support near 1177 and now expect to see support closer to 1180.
The Eurozone Stress Test will soon begin more importantly soon be discounted. By discounted I mean that gold will have the psychology of the report out of the way and focus will turn to other things. Probably back to sovereign debt. That has been lost as Europe has successfully changed the market’s focus away from the debt to other issues. Since the ECB announcement of its “rescue package”, gold has lost its upside momentum. Once the stress tests are over the market will have reason to turn its focus elsewhere. I don’t see it doing so just yet given we’re too close to the test just beginning.
After a while, expect the test results to wear off but keep in mind that it’s possible that the results will be so bad as to set gold of and running to the upside, possible but probably not probable.
Overall, as long as the weekly chart pattern holds together, I remain longer term bullish. However, right now I see the bears as being in control. Where support on the daily chart comes in and when the Swingline High is taken out on that chart is all important. Until the chart pattern on the daily chart changes to embedding or taking out a previous Swingline High I think it best to just observe.
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-- Posted Thursday, 8 July 2010 | Digg This Article
| Source: GoldSeek.com
