Gold: 1,330 Broken, Hedge Funds Unwinding Positions

The yellow metal took a significant downturn yesterday following the break of 1,360 support. But that was already in the books when price traded below the 1,365 level on 10th September. However, the quick descend lower was nonetheless surprising, and appears to be the result of huge stop orders placed around the 1,355 region, which sent prices sharply lower to 1,340 when triggered. Looking at how price managed to breach 1,340 quickly and made short work of the 1,330-1,345 support band (seen on Weekly Chart), it is clear that bearish trend is strong with the triggering of stops merely gravy to quicken the sell-off.

Hourly Chart
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This would mean that the likelihood of 1,330 resistance holding becomes higher, and we could see a return of selling pressure towards 1,320 and further lower. Stochastic readings are approaching the 50.0 mark where previous peaks and troughs have been seen. Hence do not automatically assume that this bullish cycle will be able to send us all the way back up to 1,340 before a Stoch peak is seen. Preferably price should pullback into the 1,330 – 1,345 support turn resistance zone with 1,345 most likely the confluence with the descending trendline when that happen. Stochastic readings should also be Overbought then, giving us a better bearish signal than if price starts moving lower from here again.

Weekly Chart
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Nonetheless, bears will not be regarded as overextended even if we continue to move lower from here. In fact, Weekly Chart actually supports further sharp bearish movement moving forward as this week’s decline adds as confirmation for the week Evening Star that has been formed last week. Stochastic readings also suggest that we are at the start of a strong bearish cycle which opens up 1,200/Channel Top as the 1st bearish target and potentially lower lows for 2013.

Fundamentally, we need to remember that the rally from July lows were fueled by Hedge Funds, and the fact that we had a huge stop orders floating at 1,355 suggest that a sizable portion of the Hedge Funds may have actually exited their positions already. Unfortunately today’s COT numbers will not be able to reflect this as the numbers would be based on Tuesday’s positions. Hence we will need to wait for next Friday’s numbers for a final confirmation. However, last Friday’s COT numbers already suggest that weakness was seen with slight decline in net-long positions. Therefore, if this week’s net-long positions decrease further, we may already have advance notice and will not need to wait for next Friday’s for the assertion to stand. Furthermore, prices did see sharp decline on Tuesday this week, hence making this week’s COT a good reflection of actual Hedge Fund flows.

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