Technical Analysis

We see a clean closing daily break below the Thursday low and subsequently the bottom of the range and November trend-line, the bias will quickly shift to bearish. In this case, the first potential line of support is a slope rising up from December under the May low. How much the market leans on it as support is unclear. Price action around a test of this line, should we see a drop, will determine whether we should pay mind to it. If it were to give-way then there isn’t anything significant until the May low at 2352, and then the important February 2016 trend-line which lies not far below.

Heads up: Later today we have June FOMC minutes at 18:00 GMT, then Friday the June jobs report will be released. Both have market-moving potential over the short-term, with the minutes likely holding the largest implications.

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With the ‘head-and-shoulders’ (H&S) top having officially triggered we should continue to see weakness develop. This type of formation, as is the case with any technical pattern, has a measured move target (MMT) which is derived by its size (height subtracted from the neckline, in this case). That points to approximately 11630. But that is a symmetry-derived target and doesn’t take into account actual price points. With that said, there is support along the way which we’ll want to keep an eye on. The first up is the gap-fill not far below at 12048, then the swing-low in April at 11941, followed by a swing-low in March at 11850. The March swing-low is fairly minor in terms of its relevance, but the fact the 200-day MA clocks in right around the same point makes ~11850 a big support level. Then comes the measured move target at approximately 11630.

What will turn a bearish view around? The DAX has its work cut out for it before we begin seeing a bullish price sequence develop. For now, we’ll stick with a short bias until we see price action suggest we should do otherwise, and update as things progress.

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The trend is undeniably weak since hitting a record high in June, the weakest of major global indices at this time. The euro continuing to press on to two-and-half year highs is certainly not helping the cause for investors. The correlation between the DAX and euro is a strongly negative 87% over the past three months. For traders, the trend higher in the euro, lower in the DAX has provided opportunity in a low-volatile global market environment. It’ll be interesting to see if the strong relationship between the two will persist should we see a turn in the euro (As we discuss regularly in webinars, correlations can get turned on their heads without warning.)

The DAX volatility benchmark – VDAX – is trading up over 14, which still isn’t very high, but certainly an improvement from the string of sub-10 readings we recently saw in the VIX, the volatility benchmark for the S&P 500. So, if there is a major global index to look to for volatility it’s the DAX, along with the Nasdaq 100, which has also experienced volatility in its own right. The Nasdaq 100 volatility barometer – VXN – is trading over 14.

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Looking at the German index from a pure technical standpoint, in a bubble, the trend off the June highs after breaking the neckline of the H&S topping formation continues to point towards more weakness. And, as long as it stays below the area surrounding 12300 sellers will continue to be in control. Looking lower, support arrives in the 11950/40 vicinity where the 200-day MA and 8/11 swing-low arrive. After that, 11850, then the measured move target of approximately 11600. The ‘MM’ target isn’t an actual support level but based on the size of the ‘head-and-shoulders’ top (height subtracted from the neckline).

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The area surrounding 12300 has been formidable during the course of the past few weeks, an area which we maintain as an important line-in-the-sand. As long as the DAX stays below then the sideways to downward bias remains intact. Today, we are seeing the market struggle around the trend-line off the June high. Overall, the price action for much of August is beginning to take the shape of a triangle. It won’t be long before it’ll tighten up towards completion.

Given we are still operating within the context of a broken H&S formation and general downtrend it appears likely we would see an eventual break lower with just a little more time for the pattern to mature. If full maturity is to be seen and lower prices as a result then we won’t see a push beyond the low-12300s, and likely not even much of an attempt from here to trade beyond this formidable threshold. If, however, the market does push beyond resistance (especially after a developed triangle) then of course the outlook will be altered and we’ll be certain to take note.

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The most recent driver to provide fuel for Gold prices was last night’s missile launch out of North Korea. This time, North Korea’s missile traveled over Japan, raising worries of an actual attack. This brought a brief run of risk aversion to global markets, which has begun to recede as we’ve moved deeper into the U.S. session. This is likely why we’ve seen a chunk of that recent top-side breakout erased as a retracement has begun to show. This highlights the danger of trying to chase Gold prices at the moment: Volatility is likely going to continue to show on both sides as these very pressing themes of Dollar weakness and global risk aversion continue to develop.

For traders looking at taking on long exposure in Gold, they’d likely want to wait for some element of support to show before triggering the position. Given the response on Friday, the prior swing-low in Gold is all the way down to $1,274.45, which, as of this writing, would be more than $42 in risk. That would necessitate a move to $1,359 to justify a one-to-one risk-reward ratio, which would require breaking through multiple resistance levels on the way-up. Instead, an inside move to a deeper support level can open the door for bullish continuation strategies. The level we mentioned about around $1,308 could be interesting, as this was the pre-Election swing-high in Gold prices. Below that, we have the prior breakout zone that runs from $1,296-$1,300 that could be usable for secondary support. Each of these could afford a more efficient entry with stops below that prior swing.

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Spot Gold: Retail trader data shows 66.2% of traders are net-long with the ratio of traders long to short at 1.96 to 1. The number of traders net-long is 6.9% higher than yesterday and 8.5% higher from last week, while the number of traders net-short is 4.7% lower than yesterday and 8.4% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Spot Gold-bearish contrarian trading bias.

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Spot Gold: Retail trader data shows 74.5% of traders are net-long with the ratio of traders long to short at 2.93 to 1. The number of traders net-long is 4.2% higher than yesterday and 15.8% higher from last week, while the number of traders net-short is 13.1% lower than yesterday and 21.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Spot Gold-bearish contrarian trading bias.

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Spot Gold: Retail trader data shows 75.9% of traders are net-long with the ratio of traders long to short at 3.15 to 1. The number of traders net-long is 8.2% higher than yesterday and 5.4% higher from last week, while the number of traders net-short is 5.6% lower than yesterday and 6.4% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Spot Gold-bearish contrarian trading bias.

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US 500: Retail trader data shows 16.1% of traders are net-long with the ratio of traders short to long at 5.22 to 1. The number of traders net-long is 0.3% lower than yesterday and 10.5% lower from last week, while the number of traders net-short is 2.9% lower than yesterday and 0.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests US 500 prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed US 500 trading bias.

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