Like the push-me pull-you animal from Doctor Dolittle, when one market falls another rises, and such was the relationship between gold and US equity markets over the last few days, as the panic on Wall Street and globally sent equities falling and gold surging higher on safe-haven buying. While this was no doubt excellent news for gold investors, the question they will be asking now is whether this is a significant turning point or simply some short-term respite from the longer-term trend lower. And to answer that, we need to turn to the daily chart for one of the US indices, and here I have selected YM Emini, the futures contract for the Dow 30.
The key candles here are the wide-spread down candle, and the extended doji candle, which followed the day after and, in particular, the volumes associated with both. Note first the volume on the wide spread candle. On the day, the index fell over 1000 points, a dramatic move lower, and yet note the volume – not even twice that of the previous day – sending a clear signal of an anomaly. For such a move we would expect to see extreme volume, but we do not and this did not appear until the following day, suggesting the previous day was merely a ‘trap move’ to panic the market, sending a clear warning to the Fed. The following day is where the first phase accumulation takes place with the market makers stepping in to buy the selling pressure and bring the rout to a halt in a violent day of trading. Just as with an earthquake, we are now witnessing the after shocks, which though milder are still significant and can be expected to last for several days. Thereafter, once the markets have calmed, selling pressure has been mopped up and nervous buyers return, so expect to see bullish sentiment return as indices recover their equilibrium and the longer-term upward trend is established once more in much the same way as we saw early in the year.
And for gold traders and investors there are two events to consider this week. The first is Wednesday's Fed minutes and the second is the Italian budget, which has now been sent to Brussels for approval (or not) as a decision is expected later this week. If the budget is rejected, we can expect to see a further flight into safe havens such as gold and into the Swiss franc for the Italians.
Charts from NinjaTrader