Over the years I have written extensively about gold in all its various phases, and associated drivers, one such of course being gold’s correlation with the US dollar. However, a point I have made many times in the past is that such correlations do break down from time to time, and this is the case at present. When this relationship is working as expected, gold rises as the US dollar falls and vice versa. But not so at present with the recent weakness in the currency of first reserve having little or no effect on the precious metal which on some days has been falling in lockstep.
Looking at this from the inverse perspective, when gold and the US dollar are rising in tandem this is generally considered to be a worrying sign with the currency and the metal being bought on risk flow. If the two are falling, can we assume the opposite to be true? Certainly as far as risk on sentiment is concerned this may well be the case, with both the NQ emini and the ES emini breaking through very strong resistance on the daily charts which has been capping any advance for almost two years.
From a purely technical perspective the metal continues to trade in congestion on the daily chart at the volume point of control denoted with the yellow dashed line with price agreement having been reached for the time being. This is the fulcrum for the precious metal and also represents the heaviest volume on the histogram, with no bias to one side or the other. What is interesting is the price action which follows each rally, with a sharp move lower, coupled with lower highs. Friday’s price action was also a further sign of weakness, with the effort to breach $1520 capped and closing with a deep upper wicked candle on higher volume. A sign of selling which has followed through into the start of the new trading week.
A quick look at the monthly chart also highlights the principle issue with gold in that it is still confined to the spread of August’s volatility candle which is a $150 per ounce range. The indicator calculates price action using average true range and appears once this metric has been exceeded for the instrument and is a signal for congestion to follow or a reversal.
In summary, the bullish tone which has propelled gold higher over the summer appears to be waning and with no sign of any inflation on the horizon and risk on gaining traction, this is all adding to a heavy tone for the metal with further congestion around the volume point of control expected.
By Anna Coulling
Charts from NinjaTrader and indicators from Quantum Trading
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