It’s the proverbial pie in the face for traders who were sure gold was destined for higher highs.
On Monday, gold prices, along with the SPDR Gold Shares (GLD), plunged a stunning 2.3% — the biggest one-day dip of the year — when Portugal’s debt crisis didn’t cause the country to sink into the ocean and drag the rest of Europe down with it. The closing price of gold on Monday was $1,306.70 per ounce, pulling the commodity’s price to its lowest level since June 18.
That was the day before gold prices soared after Janet Yellen vowed to keep interest rates low, and thereby keep the U.S. dollar suppressed.
The $64,000 question is, of course, what’s next for gold prices? Answer: most likely, more downside.
It may not be a popular stance. It’s a stance the technical clues support, however, now that the market has been reminded gold is not as infallible as it was 2010 and 2011.
Truth be told, had gold futures not fallen quite as far as they did, it’s possible this conversation wouldn’t be necessary. With that last few cents of daily loss, however, gold prices slipped under a key support line (and a former resistance line) at $1307. Now that they have, gold futures could slide all the way back to the early-June low of $1240 before a major floor is found again.
But there’s plenty of reason to believe gold will indeed find support around that level. As one can see when zooming out to a longer-term chart of gold, the $1,240 mark was the last springboard the commodity needed to kick-start the rally we saw unfurl in February.
Yet, if you take another step back and look at gold from an even greater distance, you have to wonder whether gold prices were going to implode here regardless of the reason. Last week’s peak of $1,346 is the fourth node in a relatively straight line tracing all the major highs going back to highs hit in May of 2013.
Knowing that all charts tend to fall in line with the norm rather than become an exception to the norm, odds are good that traders would have found another good reason to dump gold.
See, more often than we care to admit, the market’s action dictates the tone and topics of the news rather than the other way around.
Whatever the reason for the rollover, traders should embrace the reality that gold futures have been more prone to following through on reversal patterns rather than mustering long-term trends of late. And there’s little doubt that Monday’s action has underscored a pullback effort that started to take shape last week.
While there’s a good chance we’ll see a modest bullish pushback after Monday’s drubbing, the damage has been done. Another lower close and/or a close under Monday’s close of $1,306.70 could serve as the final nail in the coffin. Either way, gold futures have likely set their sights on $1,240. Should that level fail, the $1,190 mark comes back into view as a floor.
But what about the fundamentals?
To the extent they matter in the short run (which isn’t much) to gold prices, they’re already reflected on the chart — the big retreat on Monday suggests near-term traders don’t see any bullishness in the fundamentals.
It’s unlikely that perception will turn around now that the plunge from gold has rattled its fans and followers.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.