“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Friday, June 28, 2013

Heavy Call Option activity in GLD

Dow Jones is reporting that some very large bets on a rise in the gold price from current levels are currently being made in the largest gold ETF, GLD.

Gold has dropped to within spitting distance of support near $1150 before rebounding higher as it was led up by Silver in today's session.

The catalyst seemed to come from the Consumer Sentiment number which was quite strong, surprisingly so. Under recent conditions, this sort of number would have been expected to generate strong selling across the precious metals sector as it further feeds the theory of tapering to begin earlier than expected.

What seems to have happened however is that when the wave of selling did not materialize, bottom pickers, as well as extremely profitable shorts, decided that was a signal to either book some profits or establish some new long positions.

Further complicating matters - it is not only the End-of-Month positioning and book squaring that is at work but also the even larger End-of-Quarter movements. Large investment funds and hedge funds will generally square their books especially after amassing such large profits on the drop in gold and gold shares over this past quarter. That generates another wave of buying.

I prefer to see what gold does next week as we start a new quarter to get a better read on whether or not we have established a lasting bottom. I still expect rallies to be sold in this market but from what level is a bit unclear. A second test of the overnight low down near $1180 would be most revealing as to whether the carnage in this market has finally come to an end.

The mining shares are quite strong today and continue to build on yesterday's mild gains. That is a good sign as they led this market lower and I believe will lead it higher when a permanent bottom is finally forged.

Take a look at this quarterly gold chart. This appears to be worst quarterly performance for gold in history!


If we ignore that spike high to $1900 and draw out Fibonacci retracement levels off the triple top at $1800, gold has bounced off the 38.2% Fibonacci retracement level of the entire move beginning back in 2001. That level is near $1200 (1207 to be exact). That is constructive but quite frankly, this market has been beaten up so badly that a bounce of some sort was way overdue. I prefer to err on the side of caution as gold is entering a seasonally slow period for demand with the summer doldrums coming up. That, plus the fact that we have a big June payrolls number coming up soon and if that thing comes in stronger than the markets expect, it is going to further feed the TAPER psychology.

Let's be clear - all the way down we have had bottom callers and none of them have been correct. Eventually they will get it right but as the old saying goes, even a stopped clock is right twice a day!  Let's monitor the subsequent price action for a while before getting too dogmatic. Remember the trend in gold is now down on the shorter term charts so specs will be looking to sell rallies unless something changes on the QE front or the psychology in the market changes to one of expecting a pickup in inflation.

There is no need to be a hero and try nailing an exact bottom. It is next to impossible to do that on a consistent basis. Traders do not need to call exact tops or exact bottoms for that matter. All they need to do is to spot the change in trend and position themselves to take 60-70% out of that trend to make money. Remember, Bottom pickers and Top pickers eventually become cotton pickers!

9 comments:

  1. Dan - I think the trading joke for picking bottoms is this:

    "Pick too many bottoms, and all you end up with is a stinky finger!"

    ReplyDelete
    Replies
    1. Bradley - that is a solid bit of TRUTH!

      Delete
  2. Thanks for your sound advice Dan.
    I am not a trader but will sit on the sidelines and watch before I jump back in.

    We have all seen these hopeful 1 day rallies before. Just take a look back on the charts, it looks like Gold has only managed to rally more than two days in a row twice in the last six months!

    Ignore the hype about astroblasting from here that you will be reading, listen to what Dan is telling you.

    ReplyDelete
  3. Once you have many follower beware the trade will go against you prediction.

    If you it right 8 time , it is best bet again your 9 prediction.

    take a look at tocom rubber back in 2011 - 12. Extreme bulllish due to supply issue , just to se. 4 day water fall force liquidation by 35% And then rally back by 25% in the 3 days.

    It is just pure liquidation.. Nothing more then this.

    Two years ago, I hear people buy gold on dip.

    Now I hear people sell on strength.

    It is,quite entertaining.

    The spec can only squeeze for a short of period of time.

    I am really feel sorry for those people got stop out of silver yesterday. Just to see price got back to where it was.






    I

    ReplyDelete
  4. As always, thanks for your informative articles, Dan!

    Can someone post a link to where the reference to the heavy call option activity was mentioned by Dow Jones or was this some type of subscriber info?

    Thanks

    ReplyDelete
    Replies
    1. Here you go -

      http://blogs.wsj.com/moneybeat/2013/06/28/options-traders-bet-on-gold-bounce/

      Delete
  5. This is perhaps the worst new ever for gold bulls.

    What we needed to see is for gold to rally a bit, and the shorts get greedy and pyramid their positions.

    Instead, everybody and their brother is going to attempt to game this turn, and we'll rally hard for awhile, then plunge to new lows after the short term traders have all piled in.

    ReplyDelete
  6. Dan- great article, thank you for your insights into the miners. I frankly do not understand why more gold producers do not hold onto to the gold they produce(after expenses are met), and sell when metal prices rise. Maybe some are...

    Do you suspect silver miners could also hedging?

    ReplyDelete
  7. Dan,

    What do you say about plotting the gold chart on a log-scale?

    I've been doing that and it actually makes a perfect channel from the lows of 2001 until now. The chart just slightly broke out of the channel in August/September of 2011 on the high side and now again on the low side, but it managed to close within the channel.

    ReplyDelete

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