Gold regains shine as threat of October volatility increases

In yesterday’s note, we reminded of the reputation that October has as a volatile month for equities, enhanced after the volatility episode of October 2018 that culminated in a 20% fall in global stocks over the final three months of the year.

At the heart of the 2018 October volatility episode, rising interest rates coincided with an escalation in President Trump's trade war with China and slowing global economic growth. During 2019, the U.S. economy has weathered the impact of the trade war better than most, aided by the Federal Reserve cutting interest rates and a resilient consumer.

However, the overnight fall in the Institute for Supply Management Index (ISM) to 47.8, to its lowest levels since the Global Financial Crisis, has fuelled fears that ongoing weakness in the manufacturing sector will derail the resilient consumer and services sector of the U.S. economy. The link between manufacturing and the consumer, highlighted by the employment sub-index of ISM falling deeper into contractionary territory to 46.3.

The fallout from the weak ISM print has resulted in the seemingly Teflon coated S&P 500 falling by -1.30% to be on the verge of closing below the key 2940/30 support level and triggering the bearish case mentioned in yesterday’s article https://www.cityindex.com.au/market-analysis/will-the-sp-500-remain-teflon-coated-in-october/.

Should the S&P 500 bear case be triggered, gold (and gold stocks) offer a potential hedge. This is based on golds well documented safe haven qualities as well as on the technical setup outlined in this article in early September https://www.cityindex.com.au/market-analysis/at-what-level-is-gold-a-buy/.

Technical update: Overnight gold has bounced from the support offered by the wave equality “abc target” at 1462. In addition, a potentially bullish reversal daily candle has formed that provides the set up for a long trade.

Should gold continue to rally above the high of the reversal candle that formed overnight, it would be a positive development and warrant opening longs in gold on a stop entry at $1491.20. If the entry is triggered, the stop loss will be placed at $1457. The initial target for the trade is a retest of the September $1557 high with scope to > $1600.00.

Source Tradingview. The figures stated are as of the 2nd of October 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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