It turned out to be the high.
Last post (gold around 1175, having seen the 1205 high established) I said that gold looked very technically weak. I hedged myself nicely not taking a super strong bearish stance but saying that short was a better bet than long. I saw strong resistance at 1192 and the ability for gold to drop to 1140. It didn't really make sense to take a directional bet because the outcome wasn't obvious and betting one way in such a tight range really just wasn't worth it (too easy to get stopped out as a speculator, with too little upside to compensate for that risk).
I did say however that if gold were to break 1140 that it had the potential for extreme downside and that picking the next line of support was not easy. Well, we came pretty close to 1140, and now we're hovering just above it. The same guys I read who saw 1205 as a potential top, also see this 1140 level as critical for gold. There aren't many people left trading this market. I've been saying that for some time now, and it has only become more true with time. That means that if the smart market prognosticators are saying this level matters; it does. Because the interested parties certainly must read the technical geniuses I read.... while the expense is significant for someone like myself who is not backed by a major financial institution... the few people we trade against have enough money for the technology that has made this market so automated....so they definitely have the money to purchase the subscriptions that I do.
But I don't think it is surprising that this level is considered so significant. Forget the price for a second. Let's just look at how we got here and consider how it might resemble patterns of the past.
Looking above at the 3 year chart for gold remember the significance of 1180 (discussed in previous posts). It was the low after a huge selloff in June 2013. That low held again at the end of the year and wasn't restested until last October.... After it did, it was not long until it finally broke the low, making the new low of 1130. It looked like the end for gold there, but it manged to rally big. Nonetheless, the fact remains that the third test of 1180 led to a minor hopeless short lived rally which led to a break to a new multi-year low.
1140 is essentially the same as 1180 was at this point. While the low of 1130.4 was the lowest level gold had seen since May 2010 (3 months before I started working on the floor) it was merely and intra-day low. From a daily settlement perspective, (which tends to gain more technical significance than the low itself) gold has not settled below 1140 in over 5 years.
Above, the chart shows how while gold made a low of 1130.4, it settled (after a miraculous rally) near 1180. The low settle was 1140 on November 5th 2014. Still, no settle below... but man are we getting close.
I want to point out what I believe to be the most reliable indicator we have seen in gold. When major support (as 1140 has certainly become) or a major trend line gets approached and consolidated upon, it often signals the end of a trend. Looking at previous posts, you will see my emphasis on the fact that levels of support and resistance that have been tested once or twice briefly, but consolidate on the third time tend to break. Consider what is going on from a buying and selling perspective.... unlike most things in this market it kind of makes sense.
1140 is the low, and when 1130.4 gets tested gold has a massive intraday rally. This establishes that there is a strong buying force at this level. The level does not get seriously tested again for months.The low of 1141.7 on Dec 1 2014 was also followed by a massive intraday reversal... again establishing that that level had strong buying. Both the 1130.4 low made on Nov 7 2014, and the 1141.7 low on Dec 1 2014 led to rallies where gold SETTLED HIGHER than it had on the previous day...a sign of serious buying.
The trendline connecting those lows has been broken, and we are seeing lower settles and rather weak relief rallies that can't seem to gain any significant traction. So how can we say this in a simple sentence?
Gold is retesting levels which have previously seen strong buying, but has now settled lower for 5 straight days.
The strong buying that was there to come in with size on the lows has disappeared. Could they show up? Sure, a chart can't tell you if or when a major new buyer might come in., but the general idea seems to be that down continues to look like the more likely scenario.
Last I wrote, I said that the downside was far less predictable in terms of where you might expect buying to come in. I have some thoughts on it, but none of them are really that well founded, so I'll skip sharing them for now. But I can see a few scenarios playing out. Either way, I think there may be potential here for a trade with a limited stop with potentially multiples in upside.
The idea is that if gold breaks this 1140 level, and sells off to 1135 or so, you can get short with a stop around 1156 ((20 dollar loss). But if it is to keep going south, I think you can confidently look for 50 dollars (1080). Here are the 2 scenarios I can see should gold sell off another 5-10 dollars.
It sits and baffles all of us with how it could break such a major support level and just sit there. I have been watchng platinum. A few months back I started casually looking at platinum and studying it a bit. I was honestly awestruck with how it managed to make multi year lows and just meander slightly higher and slightly lower. Platinum, which not long ago traded at a premium to gold, is flirting with the 1000 level( it did finally break down a bit), but I had thought it was clear that it should've broken down far earlier. Looking at it, I began believing I couldn't trust in what seemed so apparent. Anyone who has traded these markets knows how painful it can be to see an "obvious trend" that you lean into just to see a sharp reversal. Had I been short platinum (I don't trade it currently) I admittedly would've covered in frustration. It sold off, it just took a little bit of time.
So, in scenario 1, gold could sit and tease us like it always does, and make us impatient with our short, and cause us to cover. But, if we stay disciplined, you could have the 20 dollar stopout I mentioned, and leave emotions out of it. Gold has been a terrible market for speculators as the number of false breakouts and breakdowns have been enormous. So why would I think this time is any different?
Aside from the reasons I listed above (difficulty rallying from former points of strong buying) there is the potential for an exponential kick to this trade. And that is that hedge funds decide to pile on shorts once it is clear that gold has broken this level. This is Scenario 2.
Funds who play with big money aren't concerned with the day to day minutia that traders like I am. Gold rallies or sells off 5 or 10 bucks... it doesn't matter. They aren't going to try to collect pennies. They want to make bets that can really make money. So, if some big money fund that is long decides to bail, or some other fund decides to short the market, next levels of support could be a long way off. They'll hold these shorts potentially looking for 100s of dollars in returns. When consolidation occurs around a major support level, it likely means that there are more sellers to absorb the buyers than there had been previously. As such, someone who stops out of a long position, or adds a short position in any sort of size can influence the market drastically. Shorts piling on with no obvious support in sight makes the proposition of "buying the dip" all the more scary... and the potential for a true wipe out all the greater.
While it is getting late and perhaps I will go into the chart at a later time, consider the price action around 1500 before gold broke down 300+ in months. I think you will see some of the concepts I discuss here relating to the price action up there.
As for the trade; While futures and my opinion on them effect my trading, I am not a directional trader. I trade options, trying my best, given my understanding of an environment, to put on trades that I expect to work over time. But in some market environments, I am not betting so much on the likelihood of the outcome, as the potential severity of the outcome. If I had to make an even money bet, I would bet gold goes lower from here, but I try not to make even money bets. If you tell me that the point I can stop out on the upside is less than even the highest of my downside targets, I'd definitely take the bet. It is unclear where you can look to cover but last 3rd low test (1180) gold made the 1130 low. That got you 50 bucks. If that is your expectation, and you can stop out 20 higher, you'll do very well making 50/50 directional bets. If funds decide to pounce on the weakness, you could see a return 5x+ greater than your stop loss.
I've been bearish down here before. I've been wrong before. But I think this time is a little bit different from a trading perspective because you can more easily identify the levels at which you are right or wrong.
I think if you see gold settle in the 1130s tomorrow, it is worth the shot because of the convexity of the trade, and the defined level you can comfortably get out.
Janet Yellen talking about re-iterating her intent for a 2015 rate raise isn't helping either. Her dovish words have led to rallies to put an end to downtrends time and again. Following gold's muted rallies and failures during Greece-mania, "less dovish" words from Chair Yellen are not helping its cause.
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