Kitco News) - Mon Oct. 31—December Comex gold futures set back Monday as the market corrects a portion of last week's sharp rally. However, for now, a bullish moving average crossover signal remains intact on the daily chart and the retreat to lower prices should be considered merely corrective to the near term technical bull trend. Looking back at last week's action, the December Comex gold contract blasted higher piercing the top of a four-week long consolidation range. The breakout point is the $1,696.80/1,700 per ounce level. That old resistance and breakout point will now stand as the key technical support zone for traders to watch on the downside.
In the bulls favor, a bullish buy signal emerged recently on the double moving average crossover system using the 10-day and 20-day moving averages. On Oct. 18, the 10-day moving average crossed above the 20-day moving average, generating a positive signal. A bearish moving average crossover signal had been in effect since Sept, 21. This is a simple mechanical system. Some critique of this method is that the signals can be late and will never catch the exact top or bottom of a move. But, the general theory is that the moving average crossover system will catch the bulk or majority of a trend.
According to price analysis, as long as the December gold contract holds above $1,700 (the old breakout point), the near term technical uptrend will remain intact. The next upside objective lies at the $1,775.00 level—the 61.8% Fibonacci retracement of the September all-time high to the September sell-off low.
Dave Hightower, president of the Hightower report called last week's rally in gold "technical short-covering." In fact, he pointed to the latest volume data as a bit worrisome for gold bulls. Volume is simply the number of gold contracts that changes hand in a session.
During strong technical moves, high levels of volume are seen as "confirmation" to either a rally or sell-off. Hightower pointed to the big sell-off in gold in late September and said "we saw volume around 480,000 or 479,000 per day. Last week we saw volume at 442,000 and 437,000" for example. How does Hightower interpret that? "It means we will have trouble maintaining that [price] bounce.”
Shifting out of the technical chart mode, Hightower added "the gold market continues to behave like a physical commodity, instead of a safe-haven instrument."
Additionally, Hightower added that the recent "middle ground of an unrelenting slow economy is not that exciting for gold. The middle ground is really bad for gold—that results in liquidation.”
Pointing to the price chart, Hightower saw potential for December gold to slip back into the $1,700-1,600 type of trading range.
The latest CFTC Commitment of Traders data as of Oct. 25 "showed the speculative long position was boosted by 14,600 [contracts,]" he said. That means "those new buyers will be under pressure if the market starts to slip. Those positions were built in the $1,650/1,700 area so if you get back into that range you might see greater stop-loss selling pressure," Hightower concluded.
