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Technically gold is in a short-term downtrend having made a series of higher lows from the August high of $1433. The daily MACD is below zero and we feel trading with the trend greatly increases the probability of profitable trading. The daily stochastic’s are off extreme lows as well, which shows gold has come off oversold levels.
Tactically we feel selling rallies could be the way to go and we would protect ourselves in case the trade goes against us by placing stops above both the trend resistance at $1369, but also the 23.6% retracement of the June to August rally at $1375. This retracement level has acted as strong resistance before, having been the highs on September 19 and 20.
Our target of $1278 is the 38.2% retracement of June to August rally and represents a 2:1 risk/reward ratio.
Fundamentally, last week’s Fed meeting was dovish, however it must be said that St Louis Fed president James Bullard’s comments on Friday were negative for gold. James Bullard is a dove and has been arguing for stimulus for longer, so the fact that he said a ‘small taper could be possible in October’ was quite important.
It seems logical to us therefore that if the US can avoid a fiscal shut down and we get a good jobs number at this month’s non-farms payroll, the Fed could look to taper in October. Consensus however is now calling for a December taper by the Fed.
In US trade tonight we get narrative from Fed members Dennis Lockhart and Bill Dudley. Bill Dudley is seen as a dove and is a permanent member and therefore carries a lot of weight with the Fed. He is seen as having a similar mindset to that of Janet Yellen and Ben Bernanke and thus his comments are very important. Comments today that he is in favour of tapering the Feds bond buying could be taken negatively by commodities traders.
We are keen to watch out for narrative around the US debt ceiling negotiations. The Democrats controlled Senate is expected to vote on a bill in the coming days, which would effectively authorise the government to maintain spending at current levels; however the bill contains a provision to strip out Obamacare funding. This is likely to get no real support from the Democrats and therefore should be voted down. This brinksmanship should continue and could provide support for gold; hence our bias to sell rallies.