Several things happened on Friday and the markets reacted to them, so it’s not easy to interpret the final outcome. Was the reversal bearish or was the session bullish as gold didn’t decline substantially even though the USD rallied? Was gold’s reaction adequate, too small or too big?
Let’s start the discussion with a reminder of one of the reasons for Friday’s pre-market rally. In Friday’s Gold Trading Alert, we wrote the following:
The likely direct reason behind today’s overnight spike in the price of gold is a cruise missile strike at a Syrian airbase, most likely the one from which a deadly chemical weapons attack had been launched earlier this week. However, it's not likely that 59 Tomahawk missiles was enough to ignite a rally alone. The strike had damaged ties between Washington and Moscow, as Russian spokesman Dmitry Peskov described the U.S. action as "aggression against a sovereign nation" on a "made-up pretext".
We have already mentioned that news-based rallies are likely to be temporary – today let’s focus on the temporary impact that the above was likely to have – it was likely to boost prices of assets that are viewed as safe havens – gold and… the U.S. dollar. Both are being viewed as safe bets and thus it’s no wonder that we saw a temporary increase in prices of both assets. Consequently, the fact that gold didn’t decline is not a reflection of gold’s true strength vs. the US dollar and thus it shouldn’t be viewed as a bullish sign.
The important thing is that whereas the USD rallied further during the session, gold and silver reversed and erased (or more than erased in the case of silver) the entire daily rally before the end of the session. So, even though the initial safe-haven reaction was quite natural, it was also the case that the news-based rally was temporary – it didn’t even take one trading day for the move in precious metals to be reversed.
All in all, it appears that the reversals are the thing to keep in mind, while gold’s supposed strength vs. the USD is not. Let’s take a look at the gold chart (chart courtesy of http://stockcharts.com).
Gold’s reversal was not only sizable, it was also accompanied by huge volume – this is a classic, reliable reversal pattern. Needless to say, the implications are bearish. Moreover, please note that the sell signal from the Stochastic indicator remains in place.