“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, November 7, 2014

Big Reversal Day for Gold - But will it Last?

That's the question on a lot of minds as a result of the huge upside day in the gold market today.

Gold essentially managed to erase nearly all of the losses on what was began as a big technical downside failure but ended up leaving both sides a bit unsure as to what to expect next.

From my perspective, you had a combination of two things at work here. The first is the payrolls number which came in a bit on the low side of what the market was looking for. In and of itself, the number was not that bad but the market seemed to be looking for a reason to rally and that was as good as any.

But what compounded the move higher was the reports of Russian tanks moving in Ukraine. That was just too much for the already nervous shorts and out they came in droves.

I mentioned the other day about the psychology at work in what the gold perma bulls constantly harangue us about whenever gold experiences a sharp selloff, namely, their poorly dubbed, "Flash Crash".

"GET ME OUT AND GET ME OUT NOW" at any price is the psychology at work on the longs when selloffs are the case. Once the computer selling kicks in, that attitude then takes over. Today it was the bears screaming the same thing, "GET ME OUT AND GET ME OUT NOW" as prices MELTED HIGHER.

Of course, just as all it takes to get a move lower is a few big sell orders, all it takes to get things rolling on the upside like today is a few big buy orders. Computers on the way down and computers on the way up. It is that simple.

Take a look at the daily chart first. That is most impressive!


The price posted a huge outside reversal up day today. Coming after an extended decline like gold has experienced, it is therefore significant from a technical analysis perspective. It indicates that the market is SOLD OUT for now.

Those who have been short should have covered most of their shorts during today's session so as not to lose the tremendous profits that they have accrued over the last couple of weeks. That is where a great deal of the buying originated from today.

Here are some things that I am watching however which, while I respect the day's action, I am noting as obstacles the bulls have yet to overcome.

First is the ten year moving average ( in BLUE). Note it is still declining and note that the rally has not made it back to even this initial of key technical levels. In spite of the tremendous rally today, that 10 day is still lurking overhead. I should also note that it is ABOVE the key downside breakout level of $1180.

The test for the bulls comes early next week to see whether or not they can prove that the breakdown below $1180 was a bear trap or whether this is just another one of those violent short covering rallies that come so often in gold during its bear market and which only serve as higher selling levels from which new bears can enter the market or existing stronger hands can add to their short positions.

The verdict remains out on this in my view but I am keeping an open mind. Previous experience with gold is that it tends to put in these violent upside rallies only to then disappoint with little in the way of additional upside follow through. Will this time be different? I honestly do not know so therefore I am observing.

One thing that the gold bulls have working in their favor at this time however is the confirmation in the gold mining shares as evidenced by the strong chart action in the HUI.

Here is its chart...

Notice that it filled that overhead gap serving as resistance. That is impressive and needs to be respected. Was it an exhaustion gap signifying the end of the move and a final bottom in what has been an inexorably brutal bear market in the gold shares or is this merely the beginning of a new sideways pattern forming above the low of the week near the 146 level? Subsequent price action next week will go a long way towards clearing that up for us.


However, if you take an intermediate term view of the gold chart, that casts a bit different light on the metal which urges some caution about getting too bulled up.

Here is the weekly chart of gold. Some of you will recall this from some previous posts I made when the metal broke down below chart support at the triple bottom near $1180.

Notice that you have what chartists will refer to as a "hammer" pattern, which derives its name from price action "hammering out a bottom". However, this is the key - the CLOSE remains below the former triple bottom of $1180. I would very much prefer to have seen the market recover that broken triple bottom before turning more strongly bullish. Right now I am ambivalent.

Why? Because i am unsure whether this is merely a return to that level to test to see whether or not the same eager sellers are present or is this a move indicating a stronger move higher that can possible recapture a "12" handle?


Again I do not know as we will have to wait to see what we get next week before saying with much certainty. Right now any guesses are just that, GUESSES, and successful traders do not become successful by trading guesses.

If the bulls can take the price ABOVE $1180 and keep it there to end next week, then we have something. If not, I suspect we will see a new range trade develop at a lower level with the bottom near $1130 ( this week's low) and the top wherever the pattern develops.

I will get some more up later on when I have a chance to go over the COT stuff. Suffice it to say it is an easy matter to expect significant short covering will not show up on this week's report. That all happened today!

In the meantime I am worn out from trying to keep my sanity trading beans and cattle, which have both been all over the place as the computers have shoved them around relentlessly this week, especially the meal.

Monday we get a major USDA grains report and perhaps we will see some semblance of normalcy come back to the grains and get rid of some of the volatility that is jerking traders all over the place. But then again, given the brave new world of electronic screen trade and computers incessantly firing off buy or sell orders in huge quantities, I tend to doubt it.






18 comments:

  1. the gold-silver ratio made a new high close of move... looks like the silver weekly chart momentum indicators are even worse than last week.

    gold bulls should like the COT, with all the selling from the large specs taken in by the commercials.

    10 commandments baby: let's shut down these computers from now til sunday pre-market research time, lookn forward to it!

    cheers!!

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  2. to me, the breakdown from the descending triangle was not so convincing, since such a massive triangle should have been broken on a larger candle (and much higher volume (let's look at the 1550 breakdown)). On the other hand, couldn't it be ia classical pullback on the triangle base?
    Anyways, thank you Dan for sharing your ideas,I learn a lot reading your posts!

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    1. Yeh that was my concern also. I closed my shorts this morning

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    2. I was expecting much stronger of a move once we broke that support. I think there were too many ppl in that short trade. I was seeing strange spikes on the 2 min chart the last few days that looked like mini short squeezes

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  3. The market is tricky, volatile, plays with our nerves.
    Still, gold lost its long term upwards support.
    Then it lost its long term horizontal support at 1180, triple bottom.
    Now we may recover above the 1180 level and make bulls hope again after the saloon doors banged on the bear's faces, but the only resistance which counts for me is the upwards resistance of the red downwards channel on the weekly time unit.
    Before that are 1180, some other levels.
    I'm looking for an opportunity to reinforce my short position, but I wouldn't mind doing it higher.
    Note : the EurUsd, bouncing in the 1.2270 area, may be forming a descending wedge. Depends how high we go on the way up.
    I'll try to post a chart tomorrow.
    Sorry for the blah blah, I feel very tired. Time to go sleep.

    ReplyDelete
    Replies
    1. Hi Hubert,

      Great call on eur/usd bouncing from 1.2375 and gold bouncing from 1130!

      "Now I think that gold may go through 1180, but won't make it above the upwards resistance of the red channel"

      What number are you targeting for resistance of the red channel? Do you have a link to the chart?

      Thanks!

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  4. Sp will corrects until Nov 21. Gold could be sideway as Dan points out. In the environment of strong USD, gold can not go far

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  5. Nice bounce for sure.
    My guess would be that if we don't break $1215-ish and stick around there that we'll revisit $1140 again.

    But like TD said in a previous thread...we're one headline away from a bump up.
    Which brings me to something I wrote on here several months ago regarding Obama and Iraq and Iran.
    My comment then was that if Obama and the US re-enter Iraq with troops that it's bad news ultimately for Iran at some point.
    Were talking about a President that ended the Iraq War (not a bad thing overall but a small residual presence would've been smart imho) and has stated repeatedly his aversion to overt meddling or troop deployment in most instances.

    My comment back then was that if we saw Obama reverse his core principles and start to turn hawkish that it portends something larger that extends beyond Syria. Consider that Russia has more or less abandoned Syria as the Ukraine was heating up and they focused there instead.

    Neutralizing Syria weakens Iran and strengthens Saudi Arabia. The US slowly and selectively reoccupying parts of Iraq probably isn't a comforting thought in Iran.
    Given the possibility imho that the Iranian nuclear treaty won't be ratified to the liking of the US it opens up the possibility that the US will "lean" on Iran while in Iraq and with a sizable military presence right next door to Iran again.

    Consider the recent rumor rhetoric regarding Iran allegedly trying to engineer or build an atomic weapon. And consider the recent letter Obama sent Iran regarding Iraq/ISIS.

    And now consider that Obama just sent 1,500 troops to Iraq just hours ago. You can see where this headed I think. Tip of the iceberg stuff.
    And just 3 days after the election...h'mm, how about that coincidence?

    Obama out of character and on a semi-warpath can't be a good thing. Given the personality clash between Putin and Obama and the squeeze underway in Ukraine it wouldn't surprise me if the US increases their "aid" to Ukraine in the near future now that the elections are over and the Repubs have the majority.

    None of this worries me terribly despite how it might read but the war drum environment underway bears watching. I don't think these bonfires abroad just fizzle out quietly.

    Like TD said, we're one headline away from gold finding it's footing again. I think this bump up is all about potential headlines.

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  6. Going to see how things turn out next week but today couldve been the first day of a huge bear trap. If the bounce is weak I will more than happy to reshort but now isnt the time

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  7. Hi Dan,

    great analysis as usual.
    Today price action erased all my profits and a bit more which i made in the last weeks. If gold keeps heading north I will be a net looser. I was thinking that it would have been useful to protect my profits with GLD Call options. I never did that before but today's events turned the light in my head that some kind of insurance is necessary since a very good looking trade turned into just another disaster (I only started to liquidate close to 1280. the same place where I started to short. how stupid is that????)
    May i ask what is your experience using Option-s as an insurance? Can it be useful to do that as an extension for shorting? Do you yourself use Options for insurrance?

    Thanks,

    Kris

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    Replies
    1. kris kov;

      try not to let gains turn into losses kris. Close out the positions and book the gains and look for another re-entry point. If you have a larger position than one, you can take half of the position off and let the other half ride if you think prices are heading lower.

      As a futures trader, I do not deal with GLD but trying some call options can be useful to preserve some gains. You can also sell puts and capture some of the premium if the market looks like it is stalling. There are bull call spreads you could employ as well.

      See if you can do some study on these things and come up with something that might work for you.

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    2. This comment has been removed by the author.

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    3. Thanks Dan.
      well the rally caught me by surprise. The non-farm payroll numbers were all right (in the expected range) so i did not expect the rally go that far. In fact the non-farm payroll itself does not justify this rally. By the time I realized that it's not going to stop it was too late and I was back to square.

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  8. Hi Dan,

    I am a first time poster and a PM Bull (means to an end, not an end in itself). I read your blog regularly (among others) to retain a counter view and thereby hope to attain some semblance of objectivity and balance. Whilst I respect your technical analysis, I nevertheless question your rejection of PM price manipulations. The basis of my belief is well displayed by the five year rolling intraday Gold chart found at http://4.bp.blogspot.com/-TdFATNQOXg8/VF0TZqltBmI/AAAAAAAA630/EJCww4FV-Fo/s1600/goldmanipulation2.PNG

    With all due respect, I would be very interested and appreciative of your take on it please?

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    1. why would anybody wanted to manipulate the price of gold other than making profit???
      the governments does not care about the price of gold. and if they do they wish for a higher gold price to counter deflation.
      Dan already explained this before.
      the ones who manipulate the market does it in both ways wherever they can make profit.
      I guess today's rally also was a result of manipulation because the non-farm p.r. does not justify this huge jump.
      Perhaps a big player made a huge buy order in the right moment and that catalyzed the rally.

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    2. I agree that Spec & commercials do what you say within small ranges, yet there is an underlying longer term pattern. My point being that there are almost record high longs with very deep pockets (IAW COTS) as these markets have lost 4 years of gains and these longs are still there. What significant upside has there been to speak of? For the last few days there has been $1.5 billion and up paper gold predominantly dumped during the least liquid periods of trading, ditto for silver despite the US Mint selling out 2 Million Eagles in 2 Hours and having to shut down. This is supply and demand? Hardly. Cui Bono?

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