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Gold bears need a close below $1,368, and bulls needs a close above $1,404.
On Thursday night, gold retested the Thursday session low of $1,368, which was put in early in the day. Friday's lower price action follows a rally off of the lowest level seen in four weeks, which allowed gold to get a marked close of $1,386.90 on Thursday.
On Friday morning, the low of $1,371 has provided some support, as gold tests the major $1,383.90 resistance and retracement level.
Thursday's recovery found major resistance against Wednesday's support shelf at $1,389. It will be important for the bear camp to see a close below $1,383.90, but psychologically, it will be more important to see sustained price action below $1,380.
The trend is clearly bearish, and action in the low $1,370s will likely break the camel's back and push gold to new lows. The next major support is comes in at $1,335.60, which was the low of a reversal day. Below that, gold is supported at the previous low of $1,321.50.
Price action above $1,383.90 will help the bulls gain some intermediate-term control. Although resistance will be found at $1,389 as well, sustained price action in the mid-to-high $1,380s will likely find buyers into the end of the week, bringing the market to the next resistance level at $1,396.20 to $1,397.
Given those levels, here are two short-term out-of-the-money options plays on the gold futures that you may want to consider. Bullish traders should consider buying the June 1,420-strike calls for $900, which provides 11 days of long gold exposure. Bearish traders should consider buying the June 1,335-strike puts for $1,000, which will provide them with 11 days of short exposure.
Whatever your bias in gold, futures options are liquid and trade nearly 23 hours a day.The idea here is that in a volatile market, options can be used to trade with calculated risk.
Good luck and good trading.
Peter Schiff of Euro Pacific Capital has been bullish on gold for a long time, but now he has a new reason to buy: Japan.
That nation's sweeping plan to boost its economy has seen the Bank of Japan pledge to buy 7.5 trillion worth of government bonds a month (about 70 percent of new Japanese issuance), and Japan is embarking on stimulus in the form of government spending.
Japan's first-quarter gross domestic product data showed that its economy grew by 0.9 percent on a quarterly basis (3.5 percent annualized), which has led to a degree of optimism that Prime Minister Shinzo Abe's policies are working.
But Schiff was steadfast in his belief that Abe's plans will come to grief and that the prime minister has an unsustainable situation on his hands in aiming for a 2 percent inflation rate.
(Read More: Japan's Economy Boosted by Consumption, Exports)
In an April blog post, Schiff wrote that "the idea that informs Abe's plan, that rising prices entice consumers to buy before prices go up, is clearly suspect as economic law dictates that demand increases when prices fall."
Thus, he said, the plan is destined to fail—and quickly.
"Japan will unleash an inflation tsunami if it tries to keep its bond bubble from popping with more qualitative easing," Schiff said. "If it shows restraint, the bubble will burst, eventually taking stocks down with it."
In other words, Japan is doomed to inject increasingly more money into the system, spurring inflation, which will in turn dramatically boost the price of gold, according to Schiff.
"Gold is a buy, and the Federal Reserve and Bank of Japan policies will drive the metal to new highs," he said. "So will the easy-money policies of other central banks that are joining the currency war."
Given that gold's record price is more than $1,900 and the metal now sits below $1,400, Schiff has good reason to pick up a few ounces.
Wednesday was a tough day for gold as it dropped below $1,400 for first time in nearly a month. But traders foresee more pain for the precious metal.
"Once we broke that support at $1,418, you have to look at that as resistance," said Anthony Grisanti of GRZ Energy. "If we settle below $1,400, we're going to take a shot at $1,300."
It ultimately comes down to the dollar, according to iiTrader CEO Rich Ilczyszyn. "The dollar is the tallest midget in the room right now," he said on "Fast Money: Halftime Report." Because the currency has been strong relative to others, gold has suffered from the lack of inflation, the trader said.
"For years, gold was a great hedge against purchase power, and now that comes into check," Ilczyszyn said. "Gold will continue to go down until the price is attractive against stocks," he wrote on CNBC.com.
Gold, stocks, and the dollar are more intertwined that it initially appears, according to George Gero, RBC precious metals strategist. In a Wednesday morning note, he wrote that "the recent decline in gold prices is a result mainly of strong stocks using up dollars, as international investors participating in the 14 percent up move this year in stocks have to pay for them with dollars."
That would mean that the rally in U.S. equities makes gold less attractive for two reasons: One, it has strengthened the dollar; two, it has made gold a major relative underperformer.
How far can gold drop?
"If we get through the $1,300, gold can hit $1,100," Grisanti said.
On Tuesday, gold dropped below $1,400 for the first time in a month. That aligns pretty well with what Fortress Investment Group President Michael Novogratz told "Squawk Box" on Tuesday morning: "Gold's bubble has burst," he said. "You've tried everything you can to make it go higher and it won't go higher. Therefore, it will go lower."
Is the market's run done, or is there 40% more upside from here?
According to RBC U.S. Market Technical Strategist Robert Sluymer, the answer is "both." It just depends on an investor's time frame.
Sluymer said the market is a bit overdone in the short-term, but over a three-to-five year horizon he sees the S&P 500 taking 2,300 to 2,400.
How does he arrive at that target? Simple math.
As we head into Memorial Day, drivers are experiencing the lowest gasoline prices since 2008. So what explains the weakness?
Refiners are running strong, strong demand for gas has yet to materialize, and supplies outside of the Northeast are good. Couple that with weak numbers out of China on Monday, and you can see why demand for crude will be lagging.
I do not foresee low prices all summer long. After all, demand is expected to increase, and refiner problems are always at risk of cropping up. But by the same token, I do not see $4 gas on the horizon. Sure, we might get a few pockets around the country, but overall, it looks like smooth sailing (or driving).
So what levels am I looking at?
On the downside, I would buy at the $2.75 to $2.70 level. Indeed, gasoline has found solid support here. And as far as the upside goes, I would sell out of my position at $2.90.
Gold bears want to see a close below $1,418 Monday.
Gold sold off on Friday, reaching the lowest level since April 24 ahead of May options expiration. All week, gold was hitting a wall just below $1,480, and after reaching stops below $1,455, it picked up momentum to the downside and broke the major $1,437.50 support level.
The low on Friday was $1,418.50; however, the market found support against a trend line and was able to rally into the close. Gold reached $1,436.60 upon the floor close, and surprisingly reached the major $1,447 pivot level upon the electronic close, putting shorts on edge as the market failed to follow through.
Gold dropped three percent Friday, suffering the worst decline of any widely followed commodity as it plunged to a two-week low.
Many experts blamed the weakness on the U.S. dollar. The Dollar Index, which compares the dollar to a basket of foreign currencies, has risen nearly two percent over two days, to levels it had not seen in over a month. A rising dollar tends to hurt gold, because it makes gold relatively less expensive in dollar terms.
That's how George Gero, precious metals strategist at RBC, explained it. "Dollar moves were attracting sellers to gold as a strong dollar priced gold higher," he said.
But Friday fear is also hurting the gold market, Gero said. "Short-term investors unwilling to hold positions over the weekend left sellers with few buyers, so support levels have been breached," he wrote in a Friday note.
On the other hand, Carter Worth, Oppenheimer's chief market technician, said the chart tells you all you need to know. "A multiyear bull market has transitioned to a bear market," he told CNBC.com. "The backing and filling of late is the normal setup for the next leg down."
In other words, the tight range that gold was trading in was a precursor to the selloff—and it's nothing he hasn't seen before, Worth said. "After an initial plunge, and then a partial snap-back, any instrument usual goes quiet ... only to drop again, resuming its downtrend," he said.
Friday's close will be critical for gold.
Although gold was able to recover from the lows it made toward the end of Thursday's session and into Friday's, the nearly $20 selloff took a lot of wind out of the sails for the bull camp. Gold has continued lower, as it tried to hold major support at $1,437.50 to $1,438.80 once again, but as the old saying goes, the third time's the charm.
After recovering above resistance to reach a trading high of $1,461.20 Thursday night into the pocket of that day's initial lows, outside markets helped to add to the downside pressure.
In the week since Friday's better-than-expected jobs numbers, the stock market has been buoyant. Oddly, the Treasury market has also stabilized, and has been able to attract buyers.
The return of this positive correlation between stocks and bonds is due to the realization that the Federal Reserve has no immediate intention of slowing Treasury note purchases, so stocks will continue to move higher along with bonds.
That being said, it's difficult to argue against the theory that the stock market rally is approaching its expiration date. In the last five years, the S&P futures have had five significant rallies before a correction. If we ignore the first rally, based on the highly unusual oversold condition in which it occurred, the remaining four rallies have seen gains of between 16 and 27 percent.
The current rally has brought us up 22.9 percent from November. From a technical standpoint I believe we are about to embark upon a down move that could easily turn into the correction we have been waiting for.
(Read More: Smartest Money in US Is Dumping Bonds)
I am adopting a bearish bias in the June S&P E-mini futures at current levels, with a downside objective of 1,606. If we see the market trade 1,637, I will throw in the towel.
In the event that this downtrend occurs, I believe that the June 10-year Treasury futures will shoot up to 133.10.
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