Thursday, October 4, 2007

Healthy Reaction In Gold, Or Bear Trap?

What an interesting day in Gold. The market again sold off overnight in Asia on continued Euro weakness and Dollar strength. Gold maintained that weakness into the New York open and then around 10AM suddenly and quickly reversed course and bounced higher. Why? Weekly jobless claims were ugly. August Factory Orders were weaker than expected. The BOE and ECB held their interest rates steady putting a bid back under the Euro. The price of oil reversed higher on supply concerns and the threat of bad weather in the Gulf. All of these factors I believe triggered nervous shorts into covering their trades and pushing the market higher quickly and finitely. The burst higher was over in the space of one hour with no follow through to signal renewed "real" buying interest.

In many ways, today's action in Gold may have offered those wishing to short the market in the near term a great opportunity to do so at a better entry price. I maintain my belief that Gold is in the midst of a short term reaction and consolidation that will last the better part, if not all, of October. This reaction has only just begun, and I suspect will not have run it's course until Gold touches it's 50 day moving average somewhere between 694 and 707. I would not rule out a complete 61% retracement, to 682, of this latest leg up in Gold. Though I don't consider it likely given the strong support at 694.

A negative nonfarm payrolls number Friday morning, like last months, certainly would have the potential to circumvent this present reaction in Gold and spring a Bear Trap, but I won't hold my breath expecting to see another one of those negative payrolls reports this month. A move back below 730 should strengthen the shorts case in the short term for Gold.

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