Reversals ARE important, especially when confirmed by high volume. Thursday’s reversal in gold worked – it rallied, just as I had warned.
The funniest thing about this rally is that it has little sense, and yet it was still quite possible for it to happen. Why?
Interest rates.
They were just raised in the Eurozone, which surprised the market. Theoretically, globally rising interest rates should cause gold price to decline, just as lower interest rates have caused gold price to rally. Instead, gold price moved higher.
In the short run, that can work, though. The reason is that what’s bullish for the euro (higher interest rates set by the ECB are bullish for the euro) can be bearish for the USD Index, which can in turn be bullish for gold.
The above effect was enough for gold to reverse profoundly on Thursday, and based on Thursday’s closing prices, I wrote the following:
“The markets already have a history of behaving erratically when something unexpected happens in the Eurozone, and one shouldn’t necessarily trust yesterday’s candlestick. On the other hand, even though it doesn’t make much sense fundamentally for gold to rally here (rates were hiked), the big-volume reversal could trigger a several-day-long rally (…)”
That’s what happened. Gold price moved to its 50-day moving average, which might be the reason for gold to top here, but it doesn’t have to be. There is much stronger resistance in the form of the combination of two resistance lines. Besides, gold rallied on quite a strong volume on Friday, suggesting that the rally is not over yet.
Those resistance lines cross slightly above $1,960, and that’s where gold futures might top (after rallying by another $20 or so). Spot gold would also be likely to top approximately $20 higher than it closed on Friday.
Either way, a move higher here wouldn’t surprise me.
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Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief