Gold Reaches All Time High, Markets Reverse After Fed Announcement

The stock market was sharply higher today after Ben Bernanke’s statements regarding the Fed possible involvement in future asset purchases should the economy not improve. To use a term heard from an industry contact today, “it’s as though every time Bernanke breathes in public it’s good for the PM prices”. Gold closed for a new all time high of $1585.50 and silver finished 7% higher as the dollar plummeted for a 60 cent loss after being nearly up nearly an entire point.

Gold is up 7% in the last 7 days and is extended from the moving averages. It has a chance to confirm this breakout with a close higher tomorrow. It of course makes sense that gold would move higher with all that has been going over the past two weeks but the threat by Moody’s to downgrade the US should the debt ceiling not be raised was really nothing more than noise and should not have been taken seriously. Sure, they might downgrade the US’s credit rating if the deal is not done but to be blatantly honest there is less than one-thousandth of a percent’s chance that they will not come to an agreement by August and the market already knows this.

Bernanke’s comments were bearish but he did not say that he was going to resort to additional stimulus until he deemed it necessary. Economic data is still awful and no amount of QE will change that. Also, the last treasury auction was fairly favorable which was caused by to the instability in Europe and it is also possible that policy makers may be forced to intervene in the forex market yet again if the USD/JPY stays below 80.

On the weekly chart, today was not the first time gold had taken out a recently made peak only to fall to lower levels in the weeks following. Gold has failed confirmations above peak levels in the past (notably June 2010 and December 2010) and retraced back to the trendline going back to November 2008. I believe that for the reasons I have listed above and gold’s current overbought condition, that gold is in for another similar outcome in this instance but I do not see any opportunity to play it from the short side.

I’ve had a few questions over the last week or so on this, and I would not be buying gold at this level. Buying here would be chasing plain and simple. Until gold, or any other asset for that matter, puts in a base of support, it is dangerous to enter any long position.

The market is showing signs of weakness after the inability to sustain the highs after Bernanke’s comments earlier today. It fell most obviously because of the Moody’s threat but also take into account that today was a Whipsaw Wednesday which is a volatile trading day prior to options expiration. The reversal now sets the market up for a potential bearish consolidation above the 50 MA but nothing else is clear at the moment.

FXE had a nice morning star reveal today which is the bullish version of an evening star reversal. Note the sharp move down, followed by a gap lower and a tail on yesterday’s candle, then a sharp move up today for a gain of 1.2%. The target on FXE is $142 which coincides with the 20 and 50 MA’s and the lower half of the previous support trend in the symmetrical wedge that I had covered for a couple of weeks before it broke down the other day. I expect FXE to reach $142 by the end of the week but I personally won’t enter this trade.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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