Gold Direction Depends on Symmetrical Triangle Pattern, Global/Macro Economy
After making all-time highs back in September, Gold has retraced some of those gains and is now sitting in a Symmetrical Triangle, as traders jockey for future direction. The bottom of this triangle comes from a long-term uptrend support line and the top of the triangle comes from a short/mid-term downtrend resistance line.
The precious metal tested the short/mid-term resistance line last week as gold spiked higher after a coordinated effort by five central banks around the globe to lower rates on U.S. Dollar swaps.
Since the commodity touched the downtrend resistance line, it has moved lower and is currently testing the mid-range of the triangle and a fairly strong technical level of $1700-$1715.
The longer-term macro outlook of gold depends on the European situation, let alone our own domestic situation, but as of right now, the spotlight is on Europe.
Yesterday, Ratings agency Standard & Poor's placed the credit ratings of 15 Euro Zone nations on review for possible downgrade. Today, S&P Ratings announced ratings on the European Financial Stability Facility at "AAA", however, put the credit rating on a negative watch, which means S&P could move to downgrade the "AAA" in three months or less.
The technical perspective depends on the Symmetrical Triangle with a break above it is seen as bullish, and a break below the triangle would be seen as bearish. Traders will take into account the long-term uptrend support line as a stronger technical level than the downtrend resistance line.
Currently, gold is trading down over 1% at $1713.
If traders believe the European situation will be solved with some sort of bailout or rescue package, consider the following:
- If some sort of bailout or rescue package is announced, the Euro will rise against the dollar; consider the PowerShares DB US Dollar Index Bearish ETF (NYSE: UDN).
- Global equities will also rise, as the risk of a European default is now less intense, which will cause the global slowdown thesis to be no more; Consider going long the SPDR S&P 500 ETF (NYSE: SPY), the Vanguard MSCI Europe ETF (NYSE: VGK), or the SPDR Gold ETF (NYSE: GLD).
If traders believe the European situation will not be solved anytime soon, consider the following:
- If European nations continue to struggle and yields continue to rise, investors will flock to less risk assets like the U.S. Dollar; consider the PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP)/
- Also consider shorting European banks like Deutsche Bank (NYSE: DB), Credit Suisse (NYSE: CS), UBS (NYSE: UBS), or just short the entire European financial sector by shorting the iShares MSCI Europe Financials (NASDAQ: EUFN).
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