What's Driving Gold?

The critical drivers for gold are pointing in the same direction.

Roll your mouse over each cause and effect to reveal more detailed information.

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Recession risk on the rise

Market movers ahead

• In the US, the key event due this week is Ben Bernanke’s speech at the Jackson Hole conference. Elsewhere, we expect focus to be on initial claims and durable orders for signs of recession. 
• In Europe, we expect the flash PMI and the German Ifo to decline further. We expect France to reveal further austerity measures. 
• In China, the main scheduled event is the release of the flash estimate for the HSBC manufacturing PMI for August. We estimate a moderate decline. 
• In Japan and Switzerland, markets are likely to be watching for further monetary intervention to stem currency appreciation. 
• In Sweden, it will be interesting to see how hard consumer and business confidence have been hit. 
• In Norway, we expect GDP to show that the Norwegian economy coped relatively well in a quarter with weaker global growth.

Global update

• The global equity sell-off has resumed and bond yields in Germany and US have reached records. Signs of US dollar funding pressure are mounting. 
• The ECB continued to support the markets through the bond purchasing programme. Expectations of monetary easing are intensifying in most countries. 
• The risk of recession is on the increase. The US Philly Fed manufacturing index declined to levels usually observed when the US economy enters recession. 
• In Europe, disappointing growth data was released showing that GDP increased only 0.2% q/q. Germany disappointed as well with growth of 0.1% q/q. 
• In Japan, Q2 growth data was not as bad as expected in the wake of the earthquake. 
• In the past week, the People’s Bank of China (PBoC) signalled that it is still some time away from possible easing monetary policy.

http://mediaserver.fxstreet.com/Reports/c2fad607-032a-4cca-a9bb-2c8027975f8b/b65d3a97-f6a8-4b84-bc8e-69edb3f92f46.pdf

Trend Lines

Technical analysis is built on the assumption that prices trend. Trend Lines are an important tool in technical analysis for both trend identification and confirmation. A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance. Many of the principles applicable to support and resistance levels can be applied to trend lines as well. It is important that you understand all of the concepts presented in our Support and Resistance articlebefore you continue.

Definition

Uptrend Line

An uptrend line has a positive slope and is formed by connecting two or more low points. The second low must be higher than the first for the line to have a positive slope. Uptrend lines act as support and indicate that net-demand (demand less supply) is increasing even as the price rises. A rising price combined with increasing demand is very bullish, and shows a strong determination on the part of the buyers. As long as prices remain above the trend line, the uptrend is considered solid and intact. A break below the uptrend line indicates that net-demand has weakened and a change in trend could be imminent.

Downtrend Line

A downtrend line has a negative slope and is formed by connecting two or more high points. The second high must be lower than the first for the line to have a negative slope. Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is increasing even as the price declines. A declining price combined with increasing supply is very bearish, and shows the strong resolve of the sellers. As long as prices remain below the downtrend line, the downtrend is solid and intact. A break above the downtrend line indicates that net-supply is decreasing and that a change of trend could be imminent.

For a detailed explanation of trend changes, which are different than just trend line breaks, please see our article on the Dow Theory.

Scale Settings

High points and low points appear to line up better for trend lines when prices are displayed using a semi-log scale. This is especially true when long-term trend lines are being drawn or when there is a large change in price. Most charting programs allow users to set the scale as arithmetic or semi-log. An arithmetic scale displays incremental values (5,10,15,20,25,30) evenly as they move up the y-axis. A $10 movement in price will look the same from $10 to $20 or from $100 to $110. A semi-log scale displays incremental values in percentage terms as they move up the y-axis. A move from $10 to $20 is a 100% gain, and would appear to be a much larger than a move from $100 to $110, which is only a 10% gain.

In the case of EMC, there was a large price change over a long period of time. While there were not any false breaks below the uptrend line on the arithmetic scale, the rate of ascent appears smoother on the semi-log scale. EMC doubled three times in less than two years. On the semi-log scale, the trend line fits all the way up. On the arithmetic scale, three different trend lines were required to keep pace with the advance.

In the case of Amazon.com (AMZN), there were two false breaks above the downtrend line as the stock declined during 2000 and 2001. These false break outs could have led to premature buying as the stock continued to decline after each one. The stock lost 60% of its value three times over a two year period. The semi-log scale reflects the percentage loss evenly, and the downtrend line was never broken.

Validation

It takes two or more points to draw a trend line The more points used to draw the trend line, the more validity attached to the support or resistance level represented by the trend line. It can sometimes be difficult to find more than 2 points from which to construct a trend line Even though trend lines are an important aspect of technical analysis, it is not always possible to draw trend lines on every price chart. Sometimes the lows or highs just don't match up, and it is best not to force the issue. The general rule in technical analysis is that it takes two points to draw a trend line and the third point confirms the validity.

The chart of Microsoft (MSFT) shows an uptrend line that has been touched 4 times. After the third touch in Nov-99, the trend line was considered a valid line of support. Now that the stock has bounced off of this level a fourth time, the soundness of the support level is enhanced even more. As long as the stock remains above the trend line (support), the trend will remain in control of the bulls. A break below would signal that net-supply was increasing and that a change in trend could be imminent.

Spacing of Points

The lows used to form an uptrend line and the highs used to form a downtrend line should not be too far apart, or too close together. The most suitable distance apart will depend on the time frame, the degree of price movement, and personal preferences. If the lows (highs) are too close together, the validity of the reaction low (high) may be in question. If the lows are too far apart, the relationship between the two points could be suspect. An ideal trend line is made up of relatively evenly spaced lows (or highs). The trend line in the above MSFT example represents well-spaced low points.

On the Wal-Mart (WMT) example, the second high point appears to be too close to the first high point for a valid trend line; however, it would be feasible to draw a trend line beginning at point 2 and extending down to the February reaction high.

Angles

As the steepness of a trend line increases, the validity of the support or resistance level decreases. A steep trend line results from a sharp advance (or decline) over a brief period of time. The angle of a trend line created from such sharp moves is unlikely to offer a meaningful support or resistance level. Even if the trend line is formed with three seemingly valid points, attempting to play a trend line break or to use the support and resistance level established it will often prove difficult.

The trend line for Yahoo! (YHOO) was touched four times over a 5-month period. The spacing between the points appears OK, but the steepness of the trend line is unsustainable, and the price is more likely than not to drop below the trend line. However, trying to time this drop or make a play after the trend line is broken is a difficult task. The amount of data displayed and the size of the chart can also affect the angle of a trend line. Short and wide charts are less likely to have steep trend lines than long and narrow charts. Keep that in mind when assessing the validity and sustainability of a trend line.

Internal Trend Lines

Sometimes there appears to be the possibility for drawing a trend line, but the exact points do not match up cleanly. The highs or lows might be out of whack, the angle might be too steep or the points might be too close together. If one or two points could be ignored, then a fitted trend line could be formed. With the volatility present in the market, prices can over-react, and produce spikes that distort the highs and lows. One method for dealing with over-reactions is to draw internal trend lines. Even though an internal trend line ignores price spikes, the ignoring should be within reason.

The long-term trend line for the S&P 500 ($SPX) extends up from the end of 1994, and passes through low points in Jul-96, Sept-98 and Oct-98. These lows were formed with selling climaxes, and represented extreme price movements that protrude beneath the trend line. By drawing the trend line through the lows, the line appears to be at a reasonable angle, and the other lows match up extremely well.

Sometimes, there is a price cluster with a high or low spike sticking out. A price cluster is an area where prices are grouped within a tight range over a period of time. The price cluster can be used to draw the trend line, and the spike can be ignored. The Coca Cola (KO) chart shows an internal trend line that is formed by ignoring price spikes and using the price clusters, instead. In October and November 1998, Coke formed a peak, with the November peak just higher than the October peak (1). If the November peak had been used to draw a trend line, then the slope would have been more negative, and there would have appeared to be a breakout in Dec-98 (gray line). However, this would have only been a two-point trend line, because the May-June highs are too close together (black arrows). Once the Dec-99 peak formed (green arrow), it would have been possible to draw an internal trend line based on the price clusters around the Oct/Nov-98 and the Dec-99 peaks (blue line). This trend line is based on three solid touches, and it accurately forecasts resistance in Jan-00 (blue arrow).

Conclusion

Trend lines can offer great insight, but if used improperly, they can also produce false signals. Other items - such as horizontal support and resistance levels or peak-and-trough analysis - should be employed to validate trend line breaks. While trend lines have become a very popular aspect of technical analysis, they are merely one tool for establishing, analyzing, and confirming a trend. Trend lines should not be the final arbiter, but should serve merely as a warning that a change in trend may be imminent. By using trend line breaks for warnings, investors and traders can pay closer attention to other confirming signals for a potential change in trend.

The uptrend line for VeriSign (VRSN) was touched 4 times, and seemed to be a valid support level. Even though the trend line was broken in Jan-00, the previous reaction low held, and did not confirm the trend line break. In addition, the stock recorded a new higher high prior to the trend line break.

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When Does The Trend Change?

The following chart sequence shows a great example of how I define a change of trend. The chart is a 1-minute chart of the GBP/USD. The market and timeframe are irrelevant though. The concept applies to all markets and whichever timeframe you're using to define the trend. I just happen to currently use the 1-minute chart.

As a background to the price action we see price in an uptrend leading into a resistance area between 1.5796 and 1.5802. Momentum clearly slows as price makes three failed attempts to breach the area (1 x test of resistance and 2 x breakout failures), before finally breaking the swing low between breakout attempts 2 and 3.

I call this break of the swing low the "objective" change of trend. 

"Objective" refers to the fact that there is no discretion involved. Price traded below the swing low - there is no doubt.

However, for me, a change of objective trend definition does NOT mean a change of trend.

I define a change of trend as requiring two components:

1. an objective change of trend; and
2. price acceptance in this new area (what I usually refer to as a subjective change of trend)

Price acceptance means seeing evidence of price continuing to trade beyond the point at which the objective trend definition changed. In this example, that would be continuation lower.

A reversal straight back through the point of objective trend definition implies a rejection of the potential trend change (and usually a beautiful trade opportunity back in the original trend direction).

This is an interesting example. As shown below, price stalls immediately following the objective change of trend as both bulls and bears find some balance.

From this point, a break higher would reject the objective trend change, leading to continuation higher for a fourth test of resistance. The uptrend would remain in force.

A break down will demonstrate price acceptance, confirming our "subjective" change of trend. The trend would then be considered down.

As seen below, a break downwards occurred from the area of price stall, confirming our change of trend.

S&P downgrades US credit rating to AA-plus

The United States lost its AAA debt rating, on late Friday, from Standard & Poor’s for the first time in history. The credit-rating agency said the political system of the world’s top economy has become less stable and is still concerned about the government's budget deficit and rising debt burden.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement.

The outlook on the new U.S. credit rating is "negative," S&P added, which means another downgrade is possible in the next 12 to 18 months.


US government says S&P is wrong


The White House reacted with indignation to Standard & Poor's credit rating downgrade from AAA to AA-plus. A government spokeswoman said to media that S&P was wrong in its calculation, the debt value was overestimated by 2 billion, she stated.
Republicans asked President Obama division

NFP numbers likely to show a slight rebound in July

June witnessed very low NFP results followed by a decrease in initial jobless claims and a stronger ADP report, which builds up hopes for better employment data in July.

Most of the analysts polled agree that we can expect an improvement in NFP figures, although Illian Yotov does not allow us to forget that still "the unemployment rate could remain stubbornly high at 9.2%," reflecting the slow progress of economic recovery in the US.



If the NFP results are similar or just slightly better than those from the last two reports it will be "not enough to lower the unemployment rate, and not enough to help the greenback," according to Yohay Elam. Weak numbers could "put downside pressure on the U.S. dollar, since it could boost expectations of QE3" as Sinan Saleh points out. Such a situation would be in Adam Narczewski's opinion "obviously deadly for the dollar, especially against the yen and franc."

Read below the complete forecasts and opinions of the experts.

Bill Hubard - Chief Economist at Markets.com:

"We are expecting another relatively subpar reading on employment for July. Our estimate of a 90,000 rise in payrolls is not as soft as the May and June figures but still not consistent with any improvement in unemployment. We have felt that labour market fundamentals were never as strong as data suggested in the February-April period but not as weak as the past couple of reports. Although Initial jobless claims have been mildly encouraging and business hiring surveys imply job gains, we worry that the unusual backdrop of major policy uncertainty poses downside risk to July readings on a range of activity measures. If the next few days result in a safe hurdle of default risk that preserves financial stability and heads off another shock to confidence, recovery still faces headwinds but we would be more confident about moderate second half growth."

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

"After two dismal Non-Farm Payrolls reports which confirmed the Fed’s concerns about the 'frustratingly slow' pace of recovery, we could see a bit more optimistic employment data with consensus forecasts expecting the U.S. economy to add up to 85K jobs in July from 18K in June. The unemployment rate could remain stubbornly high at 9.2%, a daunting reminder of the lack of significant improvement in the U.S. job market. A weaker-than-expected employment report could reinforce the Fed’s view of keeping rates low for 'extended period' and maintaining its accommodative monetary policy, and could put additional pressure on the USD. On the other hand, a more upbeat U.S. Non-Farm Payrolls data could become supportive of a USD relief rally, especially if the U.S. averts a credit rating downgrade and the debt ceiling deadlock in Washington comes to an end after the August 2 deadline."

Adam Narczewski - Financial analyst at X-Trade Brokers, XTB:

"The readings for June were a bit puzzling with payrolls exceptionally weak but also with a drop in initial claims and a relatively strong ADP; For July – at this moment- I would see a reading in a proximity of +100k; I wouldn’t be surprised by an upward revision of the data for June either.
Another weak report would be obviously deadly for the dollar, especially against the yen and franc, on a surge in QE3 speculations."

Yohay Elam - Analyst at Forex Crunch:

"The US economy and the job market are still in first gear. Another month of a small gain in jobs is likely now, around 50K. This is not enough to lower the unemployment rate, and not enough to help the greenback. The yen and the Swiss franc are likely to gain on such an outcome. A loss of jobs would accelerate the dollar's losses against the aforementioned currencies, but could have the opposite impact on the euro and the pound. Only a gain of over 100K jobs can help the dollar and show that growth is back, but this scenario seems unlikely at the moment."

Sinan Saleh - Analyst at ecPulse.com:

"The labor markets has been showing signs of weakness over the past few months, where the pace of hiring had slowed noticeably, but given the recent data from the labor market, it seems that hiring continued, albeit at a slow pace. Accordingly, I expect Non-farm payrolls to rise in July between 50k and 70K jobs.
However, another weak result will most likely put downside pressure on the U.S. dollar, since it could boost expectations of QE3, although it will take sustained weakness in the labor market for the Fed to consider QE3, nonetheless, I don’t think that will stop investors from raising bets for QE3."

Andrei Tratseuski - Director of Currency Research at Forex Club:

"We see a slight pickup in Non-Farm Payroll figures in the United States in July, our projections call for figures to print between 50,000 to 75,000. We see a slight pick of NFP figures as Unemployment Claims dropped significantly in the week prior below a pivotal 400,000 mark. If another weak performance in comes from the NFP figures, we shall continue to see appreciation in safe haven assets which include the Swiss Franc and the Japanese Yen. More than anticipated growth in the NFP figures could spur a relieve rally in the United States Dollar which has been suppressed for a prolonged period of time against other trading counterparts."

Dr. S. Sivaraman - CEO and owner of i-knowindices.com:

"On Friday 05th August by 12:30 GMT NFP numbers are to be announced along with unemployment rate and hourly earnings m/m. last month there was an addition of 18k.This time the number may be within the range of 23 - 45 k. When compared with earlier lower number the market may show some USD gaining move for the week end.
USD is expected to gain considerably against most of the currencies and precious metals during that time."

Valeria Bednarik - Chief Analyst with FXstreet.com:

"The employment sector continues to be the stone in the US recovery shoe. While early this year data was encouraging, past 2 months readings deny any chance of growth for this 2011. I do believe that right now, the market is being too optimistic waiting for nearly 100K new jobs for July, and a reading near 50K will be more likely. However, the unemployment rate will remain well above 9.0%, being at the end a quite negative reading for the dollar. Outstanding positive numbers won't favor the greenback but temporarily, as won't be enough to build up investors confidence in the US currency.

Dollar strengthens vs. CHF, EUR on BoJ

 USD/CHF is gaining ground in Asia as the BoJ pushes USD/JPY and USD broadly higher. Last quoted in the 0.7715 price zone, USD/CHF is trading 45 pips above its opening price. Next resistance lies at 0.7755. EUR/USD is also reacting to recent BoJ events, easing back towards its opening price around 1.4320 after recording session highs near 1.4370.

BoJ Governor Masaaki Shirakawa said in a statement Thursday that “the Bank of Japan strongly expects that the action taken by the Ministry of Finance in the foreign exchange market will contribute to stable price formation in the market.”

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Weaker Retail Sales and Trade Balance Pushes Aussie Below 1.0700

An unexpected shrink in retail sales and lower trade balance sapped confidence in the Australian dollar, pushing it below 1.0700 for the first time since July 21st. The sharp fall in sales suggests that the domestic economy may be slowing, resulting in a longer delay of the next RBA rate hike. 

THE TAKEAWAY: Weaker trade balance, retail sales > Less pressure on RBA to raise rates > AUD weakens

An unexpected shrink in retail sales and lower trade balance sapped confidence in the Australian dollar, pushing it below 1.0700 for the first time since July 21st. The sharp fall in sales suggests that the domestic economy may be slowing, resulting in a longer delay of the next RBA rate hike.

EVENT	ACT	EXP	PREV
Trade Balance (JUN)	2052M	2200M	2699M
Retail Sales SA (MoM) (JUN)	-0.1%	0.4%	-0.6%
Retail Sales ex Inflation (QoQ) (Q2)	0.3%	0.4%	0.2%

Following yesterday’s more cautious RBA commentary after the central bank held rates steady for the 7th straight month, outlook for further rate hikes were dampened. Traders are currently expecting an 85bps rate cut by the bank over the course of the next 12 months. Additionally, yields on all Australian sovereigns dropped below its target cash rate of 4.75% with 2023 bonds dropping to 4.74%. This is the first time this has happened since 2009.

Australia Trade Balance. Chart generated with Bloomberg LP Professional Terminal.

Australia Retail Trade ex Inflation. Chart generated with Bloomberg LP Professional Terminal.

The Australian dollar fell immediately after the report after the data cemented traders’ concerns that the RBA may slow their rate policy, and could possibly even cut rates as the domestic economy slows. Additional concerns that the increasingly tightening Chinese economy may cut into demand for Australian exports led to a continued dumping of the southern currency. At the time of writing, the Australian dollar has lost 0.823% against the US dollar since the start of the trading session.

AUDUSD 5 minute chart; vertical line indicates time of data release. Chart generated with FXCM Strategy Trader

Wall Street turns negative after weak ISM

US stocks erased early gains and turned intraday negative short after Monday's opening as the ISM report showed the US manufacturing activity slowed in July.

Stocks had opened with gains on optimism the US will avoid defaulting on its debt as a deal to raise the limit was reached between Democrats and Republicans. However, the US government could still lose its AAA credit rating.

The Dow Jones industrial average lost 82 points or 0.68% to 12,061. The Standard & Poor's 500 Index dropped 10 points or 0.82% to 1,281. The Nasdaq Composite Index fell 21 points or 0.77% to 2,735.

In the US the ISM manufacturing index came in lower-than-expected. The index decline from 55.3 to 50.9 in July. Analyst were expecting a smaller decline to 55.1.