Morning Gold Fix: Don't Be Short Gold (Yet)
As gold is currently breaking out courtesy of another concerted take down of the dollar, which has sent futures surging, and the EURCHF to a fresh all time, and very ominous, low, FMX Connect provides some insight on how to trade the current gold bounce.
Submitted by FMX Connect
The last two weeks have not been good to gold. A new all time high came and went, and the market swooned $60.00 off that level. We now look like we are in a flagging bearish formation with a steep drop to follow if we pierce the 50day moving average again.
From Nic Lenoir, one of our favorite technicians courtesy, Zero Hedge.
Precious metals give worrying signs to investors. On December 7 both Gold and Silver posted key bearish market reversals. After the initial drop markets tried to recover and failed at the 61.8% retracement for Gold on the 14th. Now we have triggered a H&S pattern we are trying to re-test the neckline as resistance and have managed to hold the 50-dma for now but when that support gives and knowing how bullish everyone is I expect a major correction. The February 1350/1300 put spread can be bought for $11 or $12 right now and for any asset manager out there who is long it offers great protection and a good risk reward for people who feel like taking a stab.- Nic Lenoir
We’re Agnostic For Now
The following chart is our favorite and most understood by our team. It focuses on volatility. Volatility is much more predictable and has less noise than pure direction. So for us, as options people, it makes more sense to use it to trade. One thing worth using volatility for is finding good risk reward scenarios and using volatility breakouts to predict directional breakouts.
Simply put, the Bollinger bands currently represent shrinking volatility in terms of trading ranges. When they widen in opposite directions the trade is to go with the direction the midline takes. Your stop out is the midline. A ridiculous risk-reward. Why is this often successful? Because volatility cycles. And you are looking at one extreme of the cycle. That is not to say it can’t flat line for an extended period of time. But you will be doing nothing during that time, and your powder will be dry for the trade.
Sometimes the break out occurs, and then you get stopped out. That is ok, because the risk-reward works in your favor historically. Furthermore, if the market pierces the redline and moves to the other extreme with the bands still widening, you have what we call: “first way, wrong way”. Consider reversing your position. Note: The dark line drawn at 1372 is the 50 day moving average.
Don’t get short
The last 2 times the moving average was pierced we observed the selling coming from momentum funds. They expressed themselves heavily in options as well, buying puts in a flurry of activity that lasted 2 hours. But then it all but stopped. As the market crept back above the 50 day, all put buying ceased. Historically, options buyers are undercapitalized players or they are simply piggybacking what their desk’s bigger futures traders are doing. That is not to say they are wrong. But it is to say, their conviction is mechanical, and they react to moves. We think that for now they sold it in the hole, but are simply expressingthat belief by not getting short yet.
- The double bottom shown above is powerful support, but triple bottoms are made to be broken. If you need to be long, get long here with a stop out at that level.
- If you are bearish and need to be short sell it but use our Hourly Bollinger Band breakout to help you decide a stop loss level
- Nic Lenoir’s bear flag and head and shoulders observations are good ones, and are tempering our own bullishness.
- It is the end of the year, many Dealers have pulled in the reins hoping to preserve money for the Kung Fu Grip GI Joe. There could be a lot of noise. Lighten your volume and widen your stops.
Our position: flat. We’ll let the Bollinger bands tell us what to do. We are expressing the ”flatness” being long straddles in addition to putting on futures when the time comes. The straddles are hard to justify with the holidays’ coming, but nothing is ever easy.
FMX Connect will post a twitter alert if they spot a B-Band breakout.