To The Moon

Gold sold off sharply again this morning, extending the daily chart to nine consecutive down days. Even though oil is still trading below $100, other risk assets are already starting to wobble. Looking at the broader market action, there may still be downside risks that have not been fully priced in. It may not be time to panic yet, but a more defensive stance and readiness to exit are becoming increasingly necessary.

It was somewhat surprising to see gold fail to hold its previous major trading range, especially since this latest leg lower came with almost no resistance at all. From a strategy perspective, one short and one long trade still ended up producing a profit overall, but the high-volatility range-trading logic has clearly broken down. The move to fresh lows not only opens up a new phase of downside risk and price room, but also significantly reduces the odds of gold making another all-time high anytime soon.

Over the past few days, the market has already been circulating a historical chart comparing gold’s performance during the Iran-Iraq war with the current Iran situation, and the recent correction has been every bit as severe as what we saw around the 2007-08 Lehman moment. On the weekly chart, this is already the fourth straight week of pressure and decline, with no visible sign of stabilization. The next key support is at 4,000, followed by 3,500, which was previously the expected pullback target for this year. That would imply another 10% to 20% downside. While there is still a chance for a technical rebound, the short- to medium-term trading approach has now clearly shifted toward selling into rallies.

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Beyond precious metals, equities, especially the major indices, are also signaling further downside. As discussed before, the Nikkei weekly chart, which has been a useful leading reference, is also in its fourth straight week of decline, with a drawdown of around 20% from the highs. The bullish rebound attempts over the past two weeks have both been rejected, leaving long upper shadows on the chart. The probability that Japanese equities have shifted from a bull market into a bear market has risen sharply. In an environment of persistently high oil prices, Japan is likely to be one of the first economies to feel the pressure. And if Japanese stocks are indeed topping out and reversing, U.S. equities may not be far behind.

In fact, U.S. stocks have already been showing signs of fading momentum since the fourth quarter of last year. With last week’s break below the prior weekly low, the earlier slow-bull structure and bullish trend can at least be considered over. The more important question now may be whether the market is about to accelerate lower and enter a catch-down phase. All three major indices are starting to resemble rounded-top formations, which is deeply unsettling. Investors need to pay close attention to both headline developments and the risk of an accelerated selloff.

Overall, the surge in oil prices has already produced a clear transmission effect across capital markets, and more negative consequences are likely to emerge over time. With no clear short-term resolution in the Middle East, oil staying above $80 for longer now looks increasingly likely. A longer period of elevated oil prices would be destructive for most asset classes. While another immediate spike to new highs may not be easy in the short run, as long as oil remains above $80, the broader market regime is unlikely to change.

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Finally, I still maintain a long-term bearish view on the U.S. dollar. Although the dollar is currently performing strongly, the situation in the Middle East is fundamentally a weakening factor for dollar and U.S. hegemony. For that reason, I will once again try selectively going long non-dollar currencies this week.

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Because of the sharp drop in gold, last week’s gold strategy was ultimately mixed. The short position entered at an average price of 5,300 was partially closed at 4,870 and 4,490, generating an actual profit of $620.

The gold long entered at 4,650 was stopped out quickly at 4,420, resulting in an actual loss of $230. After both trades were closed, the final result for last week and this week was a net profit of $390 in gold.

As for this week’s strategy, the plan is to go long GBP/USD at the current 1.3310/20 area with half the intended position, and place the other half at 1.3195. The stop is set at 1.3000, with targets at 1.3700 and 1.4270.