The Dow and gold – levels to watch

The latest non-farm payrolls data appears to be having residual effects – many of them to the detriment of the US indices.

The Dow’s bullish channel from the 9 October lows saw the price action top out at the upper side of the channel at the end of the year. The index neared the 16,600 level before falling back and finding the going a little tough at 16,520. No daily close has occurred above this level since New Year’s Eve.

The indecisive dojis that became apparent on 9-10 January have been treated with a degree of caution, and we have seen a triple-digit decline to current levels. The downside halted at this point at 16,240.

We also noted that the VIX fell some 5.8%. This is the lowest close on the volatility index since early August.

Today sees the release of US retail sales data. Given the US consumer’s importance to the economy, and the fact that fundamentals seem to be of greater significance than Federal Reserve liquidity this year, any failure to meet expectations could precipitate a return to the channel’s rising support around 16,170/80. This raises the question of whether a marginal uplift in the safe-haven trade might result.

Wall Street chart

Could there be a flight to gold?

Gold appears to have created a basing area, with the $1180 lows ultimately acting as the key to any further downside from here. The calls for a decline to $1050 may be a little premature in light of the significant 29% overall drop in gold’s price in 2013, and the general sense that equity markets may have topped out for now and will be subject to greater correction from here.

For now, I’m inclined to think that we are seeing the emergence of an inverse head-and-shoulders pattern. Price action has risen through the 50 DMA this week, and we are currently trading above the 23.6% retracement from the entire move from those $1433 highs, all the way back in August.

Two daily closes above the $1241/oz mark help to fuel the potential upside. A rise through the $1267 level tends to put the $1300 level back in the frame, with a minimum textbook pattern target of around $1330/40. Breaking through the 144 DMA at $1295 will be notable, since price action has not sustained a move above this level since the dip below it this time last year.

Spot gold chart

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