Stock Indices May Offer Clues To Gold’s Next Move

The expected sharp break in April Gold didn’t materialize last week as a big buyer stopped the market 50 cents under the Fibonacci price level. After consolidating for several days, April Gold appeared poised to break out to the downside after piercing an uptrending Gann angle and finding resistance at a downtrending Gann angle. In addition, the market was trading on the bearish side of a 50 percent price level. Expectations were for the market to accelerate to the downside once the Fibonacci level was broken.

The important support area to watch today, Monday, is at the cluster created by an uptrending Gann angle at $1644.20 and a downtrending Gann angle at $1640.70. This is where the two angles nearly cross on the chart. Both prices are inside the major retracement zone identified as $1659.45 to $1628.00.

On the upside, the first target is a minor retracement zone created by the short-term range of $1717.40 to $1627.50. This zone is $1672.45 to $1683.06. If buyers can overtake this zone then April Gold will have room to the upside. The next major upside target is a downtrending Gann angle and a 50 percent price level. They form a resistance cluster on Wednesday, March 28 at $1708.70 to $1710.10.

Technically, oversold conditions may be contributing to the market’s short-term bullishness. The action on Thursday and Friday appears to have shifted sentiment to the upside, but at this time is not threatening to turn the main trend back up. All indications at this time point toward this as being a retracement move.

Fundamentally, rising bond yields, a stronger U.S. dollar and higher stock prices are the main reasons why interest in the long side of gold has fallen. Demand has softened despite continued central bank buying of gold and the almost ritualistic flooding of the market with cash. In addition, India announced that it was going to double the tax on gold imports. Since the deck seems to be stacked against gold at this time, the conclusion is that last week’s late surge was triggered by technical factors.

Since these bearish fundamental developments are not expected to go away over the near-term, I have to conclude that the rally should be short-lived and that investors are likely to pare their positions on the impending retracement. This should come to fruition if stock prices continue their assault of multi-year highs.

The unknown factor at this time is China. If this country continues to support the market on dips while encouraging the buying of gold to fight inflation then the expected wash-out to the downside may never take place. This could mean that gold is destined to trade in a wide range over the intermediate term.

Bubble-traders seem to be supporting the short-side of the market and still have a grip on the downtrend, but sentiment can shift fast especially if investors decide to shift from one asset class to another. Just take a look at the bond futures chart to see what can happen when one asset class falls out of favor even if it’s only over the short-run. If a shift is going to occur to the upside in gold then it is likely to coincide with a major correction in the stock market. Keep an eye on gold and the indices this week to see if money is leaving equities and re-entering gold.