Gold outlook: XAU/USD ‘breakout’ set to intensify as volatility surges
DXY fast approaching big level at 96.04
Report Prepared by Ahmed
Shibley
Swiss International Financial
Brokerage Co
The breakout above yearly down-trend resistance in gold has fueled a rally of nearly 4% off the monthly lows with the advance failing just ahead of a key resistance range in price. These are the updated targets and invalidation levels that matter on the XAU/USD charts from here.
In our latest Gold Weekly Technical Outlook our ‘bottom line’ noted that price had, “cleared a technical resistance confluence / the monthly opening-range high and keeps the outlook weighted to the topside… From a trading standpoint, I’ll continue to favor fading weakness while above this week’s open at 1203 targeting the 1235/38 resistance range.” The price breakout in XAU/USD registered a high at 1233 this week before turning lower with gold unable to close above the 100-day moving average for the past four sessions. Key near-term support rests at 1214/15 pivot zone with the outlook weighted to the topside while above the objective monthly opening range high at 1208.
A closer look at price action shows gold continuing to trade within the confines of the ascending pitchfork formation highlighted in last week’s XAU/USD Scalp Report. The advance took out two of our targets before turning with the pullback taking the shape of a possible bull-flag formation. A breach above the resistance confluence around 1227 is needed to fuel a push into the 1235/38 resistance target — expect a more significant reaction there.
A break below 1214 would risk a larger decline with such a scenario targeting former slope resistance (red) around ~1208 and the 25% line / 38.2% retracement at 1205 — both levels of interest for possible exhaustion / long-entries if reached. Ultimately a rally surpassing pitchfork resistance would be needed to mark resumption of the breakout with subsequent topside objectives eyed at the August low at 1251 and the October 2017 low / 50% retracement at 1261/63.
It’s been quite the twist in the US Dollar over the past few trading days. Tuesday brought a weak Dollar and a bearish test below the 95.00 level; but that theme has completely reversed course and US Dollar strength is showing quite prominently now as the currency pushes towards the 96.00 level that brought two different resistance tests earlier in October. This comes amidst a backdrop of continued potential around risk aversion: The equity recovery looked at over the past couple of days has come under fire after sellers started to make a push below short-term support. In US equity indices, like the S&P 500 and the Dow, the potential for longer-term bullish strategies remains as the support that set-in last week has yet to be taken out. But short-term, there is potential for a deeper bearish move, and this is worthy of traders’ attention in the coming days.
The move in the US Dollar over the past two days has been rather pronounced, and the pace with which this has come in is reminiscent of the bullish run in the Greenback in April-May and again in early-August. In each of those instances, risk aversion was the primary push point as fears built around Italy and then around Turkey. Given the pace of recent headlines, it appears as though that worry is coming back to the fray, and when combined with the Dollar strength that’s been rather clear over the past few days, this keeps the door open for additional upside.
On a technical basis, DXY is fast approaching a big level at 96.04. This is the 50% marker of last year’s bearish run, and this level helped to elicit two different doses of resistance earlier in October. A topside break through this resistance opens the door for a retest of the Fibonacci level at 96.47, which had come into play in mid-August just before USD reversed. This is the 23.6% retracement of the same major move that helped to provide the February low.
That move of strength in the Dollar has been very visible in EUR/USD, where the pair is testing below the 1.1500 area again. And given the pace of the headlines along with price action in USD and the building wall of worry around a variety of themes, the potential for continued bearish price action remains. The complication at this point is one of chart position, as prices remain in a zone of support that’s been fairly stubborn of recent.
The Australian Dollar is outperforming in the G10 space this morning. This is largely on the back of the jobs report overnight in which the unemployment rate dropped to the lowest level since 2012. However, the sizeable drop had been led by the fall in participation, suggesting that the jobs reports may not be as strong as the unemployment rate implies. The Australian Dollar remains technically weak with the descending trendline from 2018 peak still intact, while 50DMA also provides topside resistance.
The latest FX Treasury report did not label China as a currency manipulator. Although, the report did single China by stating that China’s FX practices deviate from the norm, which in turn suggests that the US are sending a strong message to China that they are being watched very closely. Subsequently, this is unlikely to ease the current tensions between China and the US over trade. The Yuan is weaker against the Greenback, eying a move towards 6.95 and moving ever so closer to the psychological 7.00 handle.
Both Brent and WTI crude futures are firmly in the red this morning as they continue to feel the repercussions from yesterday’s build in US crude stockpiles. Alongside this, a bearish development has appeared with the WTI curve now moving into contango (Spot price lower than forward contract), typically this suggests a negative roll yield, prompting speculators to hold bearish bets.