The gold markets initially tried to rally during the course of the trading session on Thursday, but then turned around to show signs of weakness yet again as we ended up forming another shooting star. This is a market that looks like it needs to fall a bit in order to test the $1750 level again. The $1750 level is rather important, because it was previous support and resistance. If we were to break down below there then it opens up the possibility of a move down to the double bottom underneath, which sits near the $1675 level.
If we were to break down below that double bottom, it is very likely that we go much lower, and the US dollar could see a resurgence of strength. In fact, I am seeing that in some other markets as being possible, so this is going to be very important to pay attention to. On the breakdown, we could go looking towards the $1500 level before it is all said and done.
For a move to the upside, we need to clear the 200 day EMA, and at that point it is possible that we could go looking towards the $1862 level, which would be the top of the massive gap that we formed several days ago. Nonetheless, this is a market that looks like it is ready to fall apart a bit, so I do not have any interest in trying to get too cute with this. Filling the gap certainly is something that the futures markets tend to do, but at the end of the day, this is a market that is extraordinarily negative, and as long as we continue to see a lack of concern about inflation coming down the pike, it is possible that gold could get really hammered. In fact, bonds are being bought, and this suggests to me that the market is trying to find the “safety trade” in that asset, it could weigh upon gold also. At this point, gold has a lot to do to prove itself, namely breaking above the top of the gap in order to show some type of impulsive strength. All things being equal, this is a market that is much easier to short then it is to get long of anytime soon.
