Crude Oil Outlook Clouded by Shrinking Volumes, Gold Under Pressure

By Ilya Spivak, Currency Strategist 25 August 2011 12:13 GMT Talking Points

Crude Oil Outlook Murky as Shrinking Volumes Produce Erratic Trade Gold Plummets as Investors Brace for Dual Threats in Bernanke Speech WTI Crude Oil (NY Close): $85.16 // -0.28 // -0.33%

Crude prices decoupled from equity markets yesterday, pulling back from resistance the 23.6% Fibonacci retracement level ($85.83) to form a bearish Dark Cloud Cover candlestick pattern – hinting more losses are ahead – even as the S&P 500 pushed higher. Indeed, the WTI contract declined even as the Department of Energy reported that crude inventories unexpectedly dropped last week. Further still, US economic data beat expectations, with US Durable Goods surprising smartly to the upside, which ought to have bolstered the outlook for oil demand and driven prices higher.

Needless to say, this leaves investors puzzled as to why prices fell, and the only reasonable explanation that seems to present itself is the steady downward drift in trading volume over recent days in crude oil and the S&P 500 alike. Needless to say, much of the outlook for the months ahead hinges squarely on what is said by Federal Reserve Chairman Ben Bernanke at the Jackson Hole Symposium on Friday, with many breathlessly hoping for the unveiling for another round of stimulus to underpin sagging growth. Faced with such a clear inflection point in the global macroeconomic landscape, a large crowd of investors have apparently taken to the sidelines, draining market liquidity and producing erratic price action that is subsequently difficult to explain.

Looking ahead, more of the same is likely until the Fed Chairman finally utters the words everyone has been waiting for and – whether stimulus is announced or not – allows the markets to digest what is to come in the months ahead, thereby finally expressing some directional conviction. In the meantime, initial support is $83.89 at the 38.2% Fib, while a break above current resistance exposes 50% retracement of the decline from the drop from the August 27 swing high at $88.15.

Spot Gold (NY Close): 1759.32 // -69.03 // -3.78%

Yesterday we discussed the conflict between the fundamental drivers of gold demand against the backdrop of Ben Bernanke’s upcoming speech in Jackson Hole, Wyoming. Indeed, if the Fed chairman announces new stimulus measures, this will be good for risk appetite and should drive gold lower as safety-seeking capital reverses course. However, it will also stoke inflation fears, which ought to underpin the metal as an inflation hedge. Conversely, no further stimulus presents the identical conflict in reverse, with an anchored price growth outlook negating the need for an inflation hedge but a return to risk aversion stoking safe-haven flows into the metal.

Faced with the uncertainty of what Mr Bernanke actually unveils, investors appear to have looked upon gold prices hovering near record highs at a dizzying $1900/oz and decided to take some profits lest either of the outcomes to the Jackson Hole speech prove to bode ill in the months ahead. Needless to say, this has produced an aggressive selloff over recent days, mirrored by a dramatic reversal in investor demand as evidenced by a sharp decline in gold ETF holdings.

With all this said, asking for follow-through in current conditions is clearly less than wise, and the continuity of the current move is far from assured over the coming 24 hours. Prices are now testing below support at $1746.19 having formed a formidable Bearish Engulfing candlestick pattern, the 38.2% Fibonacci retracement level, with a break below that exposing the 50% level at $1695.05.

Spot Silver (NY Close): $39.73 // -2.18 // -5.21%

In a similar setup to gold, prices put in an aggressive Bearish Engulfing candlestick pattern below Andrew’s Pitchfork resistance and are now testing through support at $39.75, the 61.8% Fibonacci retracement level. The logic at work appears to be the same as that which is driving silver’s more expensive counterpart. Critical support stands at $38.70, the intersection of the pitchfork bottom and the 76.4% Fib, with a break below that changing the near term bias to favor losses.

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com

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25 August 2011 12:13 GMT

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Crude Oil, Gold Prices Look to Ben Bernanke Speech for Direction

Talking Points

Crude Oil Prices Look to Fed’s Ben Bernanke Speech to Define Direction Gold Outlook Clouded as Inflation, Sentiment-Driven Catalysts Conflict WTI Crude Oil (NY Close): $85.30 // +0.14 // +0.16%

Needless to say, all eyes are now on Federal Reserve Chairman Ben Bernanke as the he delivers his much-anticipated speech at the central bankers’ symposium in Jackson Hole, Wyoming. Markets appear positioned for the unveiling of further stimulus, with S&P 500 stock index futures scoring healthy gains overnight. Such an outcome would naturally bode well for crude, with prices bolstered along with the spectrum of growth-sensitive assets by the prospect of added support for the sagging economic recovery.

Traders waiting for the Fed to come riding to their rescue may be due for a disappointment however. When Mr Bernanke began to unveil QE2 at last year’s Jackson Hole sit-down, the central purpose was to ward off deflation expectations. A year on, medium-term inflation expectations (as reflected in bond yields) are down over 25 percent, putting the policy’s success in question.

Meanwhile, the unprecedented move to define the “extended period” through which rates will remain “exceptionally low” at the last FOMC meeting as mid-2013 may have been the beginning of a new, post-QE approach to stimulus. The announcement gave firms and investors a clearly defined window to capitalize on low borrowing costs and enough lead time to plan to do so. This seems like a clear attempt to offset the largest perceived problem with the effectiveness of QE in spurring the private sector out of complacency: the inherent uncertainty surrounding the use of a new, unorthodox policy tool.

We noted yesterday that prices put in a bearish Dark Cloud Cover candlestick pattern, hinting a move lower is ahead. So far, prices have (perhaps understandably) yielded little follow-through, with a Doji produced on the latest bar. Broadly speaking, yesterday’s range remains intact, with near-term support and resistance at $83.89and $85.83, the 38.2% and 23.6% Fibonacci retracement levels respectively.

Spot Gold (NY Close): 1774.15 // +14.83 // +0.84%

The central conflict between the fundamental drivers of gold demand heading into Bern Bernanke’s speech at Jackson Hold that we pointed out yesterday remains intact. On one hand, the unveiling of new stimulus measures promises to stoke risk appetite and would be expected to drive gold lower as capital flows abandon safe-haven assets. However, it will also renew medium- to long-term inflation fears so prevalent while QE2 was in effect, reviving gold’s allure as an inflation hedge. Naturally, the reverse is likewise the case: no further accommodation points to an anchored price growth outlook that erases the need for an inflation hedge but threatens a return to risk aversion that sends safety-seeking flows back into the yellow metal.

Faced with such ambiguity, investors took profit on a fair bit of long gold exposure, pushing prices down 4.8 percent so far this week and sending ETF holdings to the lowest level since the beginning of August. Needless to say, where things go from here will be in the hands of the Fed chairman. On the technical front, prices completed a Hammer candlestick above support at $1746.19, the 38.2% Fibonacci retracement level, hinting a corrective upswing may be ahead after the metal took out rising trend line resistance two days ago. The initial upside barrier from here stands at $1809.48, the 23.6% Fib.

Spot Silver (NY Close): $41.09 // +1.36 // +3.42%

The fundamental ambiguity of gold seems to be likewise reflected in silver, with the outcome of the Ben Bernanke’s Jackson Hole speech now in focus. Prices put in a bullish Piercing Line candlestick pattern above support at the intersection of the 76.4% Fibonacci retracement level and an Andrew’s Pitchfork bottom ($38.70). Resistance from here stands at $41.45, the 38.2% Fib, while immediate support is at the 50% level ($40.60).

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com

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