01 December 2021

Technical Analysis

Weekly analysis: gold, Bitcoin and Brent

Omicron, the latest significant variant of Covid-19, is continuing to affect markets this week with uncertainty remaining high. Scientists and pharmaceutical companies are as yet unsure how to react, with negativity coming from Stéphane Bancel, the CEO of Moderna, while government scientists in various countries are cautiously optimistic or need more information. So far only Japan and Israel have issued blanket bans to entry for non-residents as a result of omicron.

The chair of the Federal Reserve, Jerome Powell, commented this week that monetary policy in the USA is now likely to tighten much more quickly than expected. He also raised the threat of persistent high inflation and suggested dropping the oft-repeated qualifier ‘transitory’.

Meanwhile in Vienna OPEC and OPEC+ are meeting today and tomorrow to discuss a possible boost in output of 400,000 barrels of oil daily. As things stand, it looks very likely that the cartel will maintain supply at the current level, especially considering the large drop in the price of oil since last week.

The primary effects on markets of these developments have been losses by many major shares and strong losses by crude oil. The FTSE 100 in particular posted its largest intraday loss in more than a year on Friday 26 November. Havens like the yen have generally made gains, but gold has remained pretty static around $1,785 after Friday’s upward rejection.

Gold, daily

Gold daily price chart
Gold daily price chart

While there was an initial reaction upward by gold to Friday’s news of omicron hitting markets, the typical situation of losses by most instruments took over towards the end of the day. This left a large wick on the daily candlestick characteristic of an upward rejection as uncertain participants generally reduced exposure. From a technical standpoint, the main headwinds for gold are the three moving averages bunched together immediately above the price. Breaking through these might lead to another round of gains toward the latest highs above $1,850.

Buying volume for this CFD peaked yesterday at around 140,000 contracts, the highest since early August, which would suggest considerable demand in the current area. The slow stochastic also gives an oversold signal. However, the total volume for deliverable futures on gold today. just above 250,000, is about half what it was on 22 November according to data from the Chicago Mercantile Exchange. Friday’s NFP might generate clearer direction for XAUUSD and possibly the momentum required to break through the SMAs and retest the 23.6% weekly Fibonacci retracement around $1,835.

Bitcoin, daily

Bitcoin daily price chart
Bitcoin daily price chart

As major cryptocurrencies increasingly replace gold as the go-to hedge against inflation among retail traders, bitcoin has held within about $12,000 of its all-time highs from early November. Increasing participation in crypto interest schemes as fiat rates remain negligible around the world means that demand is likely to remain high.

With average true range (14 days) currently just below 3,000, a move back up to $60,000 is quite likely in the near future, but the 50 SMA from Bands might cap gains beyond this in the near term. Unusually for a cryptocurrency, we can observe strong support from the 100 SMA: the price repeatedly failed to break below this line in September, and Friday’s close slightly below it was met with a fairly strong upward reaction over the next two days.

The slow stochastic completed an upward crossover within oversold on Sunday, which would usually be taken as a buy signal in the context of an ongoing uptrend. Like other markets, though, uncertainty for cryptocurrencies is high at the moment because there is little reliable information on the possible effects of omicron. Apart from the psychological area of $60,000 and the latest high around $68,000, the obvious medium-term target for bitcoin is the 161.8% weekly Fibonacci extension area, which is above the top of this chart around $79,400.

Brent, daily

Brent crude oil daily price chart
Brent crude oil daily price chart

Nervousness among traders of oil has been high since last week as countries like Japan started releasing their strategic reserves and most major advanced economies imposed fresh travel bans to some degree. Even before Friday’s news of omicron, though, it seemed quite unlikely that OPEC would agree to increase production. 

Most members of OPEC seemed to be at least content with prices around $75-85 for Brent and understandably the leaders of the group like Saudi Arabia are very eager to avoid a repeat of last year’s crash. Even in the unlikely event of a boost in output being agreed, it’s debatable what effect this might have: OPEC’s members would likely struggle to produce a significant amount of extra barrels daily, let alone nearly half a million.

Yesterday’s buying volume for this CFD of over 48,000 was the highest in nearly eight months, but ‘catching the knife’ is very risky in this situation. Stability from OPEC+ seems to be priced in, so a boost in output - however unlikely - could leave a position vulnerable if the reaction on the chart is strong. Equally, the breakout below the 200 SMA is still ongoing, so traditionally one would prefer to await a daily close significantly above it or another below. 

$70 is an important psychological area, but round numbers are generally less reliable as pivots for volatile commodities. Traders should also note that the slow stochastic has now joined Bollinger Bands in giving an oversold signal. Overall, waiting for a clear signal from OPEC or the reaction to Friday’s NFP might be more sensible in the context compared to jumping in now.

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