Gold was overbought weeks ago, according to this measure

Despite reaching a record high last week, momentum swiftly turned and gold closed the week with a bearish reversal candle (shooting star). Whist one bearish week is unlikely to spoil the trend, bullish fingers have been singed at the highs which means there may be some reluctance among bulls to simply jump back in.

Besides, there are a couple of key points worth highlighting from the weekly COT report which point to resistance for bulls. At least over the near term.

Gold market positioning from the COT report – large speculators

The traditional take on market positioning shows the rise of net-long and gross-long exposure increased in its intensity over the past couple of weeks, just before gold rallied to that fateful high. This suggests some of the latecomers to the party were singed at the high, even if net-long exposure has not reached a sentiment extreme. On a sidenote, shot bets were also on the rise, which is not what I’d want to see for a bullish breakout.

However, there is a plot twist if we look at market positioning through a new lens. As net-long exposure reached a record high five weeks ago, once adjusted for open interest. That was four weeks ahead of the price high and could point to choppy trade if not a pullback over the coming weeks.

I’m not calling for a large bearish reversal, as one just needs to look at the strength of the bullish trend on the weekly chart to see gold is clearly in demand. But it could serve as a warning to bulls eager to jump back in simply on the assumption that they expect a new record high in due course. For bullish setups, they may need to refer to lower timeframes.

Gold technical analysis (daily chart):

Last week I noted gold futures remained beneath its record high despite a breakout on spot gold prices. It did not nail the actual top, but it was close. Gold futures have since fallen -4% over the past four days, although process are stabilising around 2400, the 20-day EMA and a 50% retracement level. The daily RSI (2) is also oversold, all of which suggest we could be approaching a bounce for gold prices ahead of Thursday’s US GDP report.

Also keep in mind we have US PCE inflation on Friday, which has the potential to weigh on gold prices if they come in hotter than expected. But with US politics also in the mix, I do not feel inclined to get overly bearish on gold, especially as odds favour softer inflation figures.

Gold technical analysis (daily chart):

The 4-hour chart shows prices stalled almost perfectly at a weekly VPOC with a small bullish hammer, alongside a bullish RSI divergence. With momentum turning slightly lower in Asia, bulls could seek dips within Monday’s range in anticipation of a move towards 2420 or the weekly pivot point (2427). A break above this area brings the resistance cluster around 2450 – 2460m which includes the monthly R2 pivot, weekly R1 pivot and daily gap resistance.

Should GDP or inflation data come in hot, a move towards the lower weekly VPOC around 2338 could be on the cards.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge