Technical Analysis XAUUSD: 2016-10-07

Strong nonfarm payrolls report will pressure gold

A strong September nonfarm payrolls report will increase the likelihood of a rate hike this year. This will strengthen the US dollar and pressure gold. Will gold continue falling?

Gold prices have gained more than 18% since the start of the year, reversing the multi-year downtrend caused by anticipation of Fed’s monetary policy tightening. Concerns about monetary policy tightening have capped gold’s rise recently. At its September meeting Federal Reserve signaled it plans to hike rates this year if incoming US economic data remain positive. Data this week were positive on balance: vehicle sales increased in September, the Institute for Supply Management reported manufacturing sector activity rose more than expected, while construction spending declined in August as public spending on construction fell. On Tuesday reports the European Central Bank may gradually wind down 80 billion euros ($89.7 billion) monthly bond purchases before ending its quantitative easing program in March 2017 caused a sharp drop in gold prices. On Wednesday the Institute for Supply Management reported unexpectedly strong reading for the services index: The ISM service index jumped to 57.1 in September from 51.4 in August, showing the services sector expanded at the fastest pace in 11 months. However the Automatic Data Processing Inc. reported that private sector employers added 154000 jobs last month, down from 175000 in August. The nonfarm payrolls are due today at 14:30 CET. A good nonfarm payrolls report will indicate the labor market strength endures, strengthening the case for a rate hike before the end of the year. This will be bearish for the haven metal.

Two days ago XAUUSD: D1 fell more than 3% on the daily chart, breaching below the 200-day moving average MA(200), on news the ECB may start scaling back its stimulus program. Earlier it had fallen below the 50-day moving average MA(50). The price has breached below the support of the uptrend.

Parabolic indicator gives a sell signal.
Donchian channel is tilted downward, indicating downtrend.
The MACD indicator also gives a bearish signal.
The stochastic oscillator is in the oversold zone, which is a bullish signal.

We believe the bearish momentum will continue after the price closes below the lower Donchian bound at $1251.81. A pending order to sell can be placed below that level. The stop loss can be placed above the last fractal high at $1327.96. After placing the order, the stop loss is to be moved every day to the next fractal high, following Parabolic signals. Thus, we are changing the probable profit/loss ratio to the breakeven point. The most risk-averse traders may switch to the 4-hour chart after the trade and place there a stop-loss moving it in the direction of the trade. If the price meets the stop loss level ($1327.96) without reaching the order ($1251.81), we recommend canceling the position: the market sustains internal changes which were not taken into account.

Technical Analysis Summary

Position Sell
Sell stop Below 1251.81
Stop loss Above 1327.96