The information and opinions expressed below are based on my analysis of price behavior and chart activity
February Gold
As of this writing, February Gold is currently trading at 2609.60, down 52.40 on the day. Most of the selling pressure came in as soon as the FOMC announced the ¼ rate cut at 1 PM CT. In addition to sparking weakness in the Metals, Gold, Silver and Copper, the Stock Indexes immediately turned lower, as did the Treasury Bonds. The US Dollar Index did the opposite and rallied aggressively. Today’s activity changes the way I’m looking at Gold now. You’ll notice on the chart above several things: First, the 5- and 10-day moving averages hooked over to the “sell side” with the open yesterday evening. Second, today’s trade took out any support that might have been found at the 100-day average (grey, 2642 or so) Third, last Friday when the market broke down through the 50-day average (green, 2700-ish today), it failed to re-test and successfully continue above that level. For a trend to continue, I would have Fourth, while the market did make “new highs for the move” with the strong 4-day rally earlier this month it was unable to hold or consolidate at those prices. Some profit taking is one thing, the pressure we’ve seen today seems different, to me. Gold prices have shed 151.00, or so, since last Thursday’s high. That eclipses the weekly loss we saw following the US election, down 125 in the week that began November 11th. And we still have two trading days left in this week! The next reasonable support levels that I see on the chart are near the July high of 2560.08 and the 200-day moving average near 2527.00. I don’t know that we’ll see another huge day down like this, but I wouldn’t be at all surprised to see it happen over the next few days. Stochastics (bottom subgraph) are just barely oversold and the MACD (just above that) is pointing toward lower prices, to my eye. Trade Volume hasn’t been large this week, but I think that most traders that bought Gold a week ago (on high volume) are running for the exits. And I’m not certain that we’ll see “new” selling before the end of the year. It could work out that we see “Long Liquidation” as traders pull off bullish positions but do not establish new bearish ones. Either way, I think we’re headed lower. I’m not an economist, but I have a strong sense that perhaps things aren’t as rosy as the picture that the Fed would paint. So how can you take advantage of this? Aggressive and (very) well margined traders may do well to establish new short positions. I say very well-margined because the volatility is high and traders that use protective stops may find themselves in a “right direction, wrong day” type of trade, if the stops are placed too close. I think that risk may be better managed by using call options purchased against the short futures. This will act as a de facto stop and also serve to reduce your margin requirement on the futures positions. Traders that are more option-oriented may do well to wait, as Put premium has spiked today. However, a February 2500 Put last traded at 14.80 ($1,480 plus commissions and fees) and that may offer some speculative value. Those options expire in 41 days. The reason I say that those may have value, is because the 2600 Put last traded at 44.80, up 20.10 today. At yesterday’s close, that option was over 60.00 out of the money. If you choose to go the option route, I would suggest placing a GTC order to take a profit at 2x what you paid for the option. If it still looks weak when that is triggered, step back in and look for another Put for a cost approximately equal to what you paid for the first one. These markets can be fickle. Unless you’ve got very deep pockets, take incremental profits as they appear, because, as I mentioned above, volatility in Gold is high right now. If you have questions about this, please reach out and I’ll explain my reasoning further.
Jefferson Fosse Walsh Trading
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