Above is the 20 day of copper with gold in purple tracking it. Since gold dropped below copper 3 Sundays ago, you will see gold has traded below copper on this scale for almost the entire time. Now, you are seeing gold hovering above copper.
There are a few ways one could interpret this action, but my main takeaway is that if this correlation is staying in tact,we will probably expect gold to sell off small or for copper to rally.
On tonight's open Copper gapped down about 1.5 cents.
Copper filled the gap, and now sits right near where it opened. China had a few below expectation economic releases this weekend.
I was curious to see if it might lead to any liquidation in the metals. Copper got knocked down but as mentioned has held up. The question is, is this just a short term rally with a greater trend of selling behind, or was it just one small order at an illiquid time? To be fair, this is not an enormous move (it'd be the equivalent of gold opening down 6-7 dollars on the open). Nonetheless, I want to stress the importance of anyone trading this market on a short term basis to at least keep an eye on copper.
Gold's ability to withstand multiple tests of the 1080 area has created some short term support. As such, there may be some short term traders playing this market from the long side. While I do not have a strong 2-3 day view on gold, I could understand why some short term traders might look to get long between 82-90 area. I would just caution, if you see copper begin to sell off, take note. It might be the signal that allows you to save a lot of money by flattening out should copper lead the way. If copper struggles to stay above tonight's open over the course of the next few days, I would become more cautious as a gold long.
As for the trade I mentioned last time; I had said gold could be sold around 1095 with a target of 1000. I think the trade is the most reasonable out there right now given what I believe to be a very comfortable stop at 1148 lets call it. So, 95 dollar target to the downside with a stopout 53 higher. It's not the greatest risk reward ever, but I think resistance is so strongly defined near 1140 that a breach of this level would clearly mean being short no longer made sense. For someone who has a short bias, I think that is the smart way to play it for now.
If you are more selective in looking for good spots (and that is a good idea, making directional bets in the middle of our newly defined 1080-1104 range is not ideal) then I would look to see if gold can rally first and then sell into it. If for instance you were able to sell some gold around 1105, that trade gets you 105 profit potential vs 43 downside potential. A little bit of patience for a trade that is designed to last a few weeks could do a lot for its risk return profile. While I'd like to see gold whipping around, the price action of late makes it tough to get too strong with opinions in this spot. If gold manages to go below 1080 and sit for a few days between 1070-1180; I think there will be an an even better risk reward trade from the short side (sell 1075, stop out 1100, target 1000).
As far as trading gold goes, I find that it is better to be a little bit more patient and deal with missing a trade than to worry that you are going to miss the next big move. While I try my best to write about what I see as the determinants of good risk/reward situations, the price action can be very choppy in gold. While there is a longer term downtrend in tact, finding short term trends that allow for definitive entry and exit points has been and continues to be challenging. If you want to be short this market, keep a longer term time frame. Even in bear markets gold makes it hard for shorts with short term outlooks. You are better off scaling in on rallies, or waiting until there is a definitive break of 1080 to pile on. If you are looking from the long side, keep an eye on copper and the dollar. There has been a lot of correlation of late. If either the dollar moves aggressively to the upside or copper moves aggressively to the downside flatten out and wait for a better spot.
I also wanted to let readers know that from time to time my posts will be going up on the Options City blog. My last one can be seen here http://www.optionscity.com/blog/
Have a great week,
Ben
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