Gold Technicals: COT in a Trap
Graceland Updates 4am-7am
Aug 24, 2010
- The gold uptrend line in place from $1156 broke last night. Here's a look at that break: Gold Uptrend Snapped
- There's a small head and shoulders top pattern on the 60 minute chart which hints at the 1210 area, and 1210 is also support on the daily chart. Here's a second look.
- The USD has risen about 5% against the CAD in the time gold has fallen 1.5% from the $1240 area highs. Yet, those of you who have Euros or Canadian dollars (aka the cbone) as your base currency have seen your gold rise in price!
- Some of you are starting to see some of your gold juniors "pop" upside on various announcements. I maintain that much more such "golden popcorn" will be popping in September, as years of work by many of the juniors starts to come to fruition. I would argue that "Juniors Popping Corn" is going to be the number one gold theme of the next three months, regardless of the movement of the gold price.
- The 2nd theme in focus now, is the "traditional fall seasonal strength in bullion". I would tend to agree is highly likely, but I would not be getting overly excited about such strength until it happens, and then you need to be a methodical seller of your trading positions into that strength. Think: "Show me the money", not "show me the bird in the bush".
- You should have been a methodical buyer of those positions into weakness into 1156.
- Looking at the daily chart technicals, what I see there is $80 of price strength, and a massive add into that strength, of tens of thousands of short gold comex contracts by the banks. Here's a look at the Gold Liquidity Flows Report. Notice the highlighted comparisons of the commercials (mainly the banks) and the large fund speculators. The funds are in blue and the commercial banks in yellow.
- What I like a lot of you are missing when looking at these reports is the fact that the huge commercial short position put on into 1266 has never been resolved.
- The consensus in the gold community appears to be that since gold only sold off from 1266 to 1156 on the last shorts add, and this one isn't as big, any fall in the price of gold right now wouldn't even match the $110 fall from 1266 to 1156.
- My response to that thinking is: Maybe so, but I wouldn't bet ten cents on the idea. Just because all was AOK before for your accounts, does not make it all AOK again for your accounts now. The reality is that huge selling took place, in terms of fund and gold community capitulation, in the 1200-1156 area.
- There's a possibility that 1156 is the final low, but absolutely zero evidence that it is. My suggestion is that you don't take the COT position too lightly, and keep an open mind as to whether 1156 is the final bottom or not. Don't let me come visit you a week from now and all I hear playing from your room is a broken record featuring Elvis Presley singing "I'm COT in a Trap, I can't walk out, because I thought it was traditional that I make free money in the fall in the gold market".
- Most analysts look at the market as an investment. I look at it as a war. With the uptrend on gold now broken, and the latest price-chased positions put on by the overleveraged funds already underwater, any kind of gold-negative news could cause a massive sell off in the gold market, here and now.
- Here's a closer look at the technicals for gold right now.
- The Gold Cascade Notice that I like to use a series of timeframes for the indicators. A type of "cascade" is created as the shorter time frame series of a single indicators hint at coming rises or falls in price, and the move is usually well underway before the longer time frames for that same indicator confirm the action.
- The current situation shows a plethora of sell signals all over the "gold map". Sadly, most in the gold community bought nothing into 1156 as I screamed buy, and now as I've urged you to book profit into $80 of price strength, most are caught up in the "traditional fall rally" mantra, while a huge wave of potentially gold-negative news approaches, while the technical oscillators are overbought, and the uptrend line is broken.
- Could be press on to new highs above 1250 or even 1266 before this rally becomes a decline that puts fear into the gold community? Absolutely, and as I sold into 1240 I had no idea that was a short term top any more than I knew 1156 was the bottom. Focus on being a failed prophet, and a winner in market action.
- There are very few technicians that can use 60 minute (or shorter) time frame charts well. Yesterday was example number one billion of why that is true, as the 60 min chart oscillators hinted at "buy signals". All the dreams of short term gains were dashed on the rocks of reality in the night as gold sold off anyways. It's critical that you are able to operate in the market like the commercial traders (aka "the banksters") do, with the ability to layer in waves of buy and sell orders, assuming your latest buy will go underwater, as will the next one and the one after that. Here's a look at the 60 minute chart for gold using SGOL-nyse as the proxy.
- What I want to draw your attention to is the co-ordination of time frames. When the daily chart is overbought, and you get a small sell-off that puts the 60 minute chart into buy mode, you need to be very careful about looking to far upside for your profit booking targets. In reverse, if both the daily and the 60 minute charts are giving buy signals, you are using the 60 to tactically implement your buys, not to actually make the buy/sell decision itself, a subtle yet key point.
- The hysterical fear of being left out is the prime cause of price plopping, while the reality is very few investors ever make money consistently in the market. By definition, that fact means the vast majority of price-plopped buys go underwater and stay there, for a long, long, long time. Yet, horrifically, crew after crew of price chasers buy their market lotto tickets hoping to win the "exception trumps the rule" lotto.
- On that note, huge numbers of investors from outside America have purchased US residential real estate, believing they have purchased a great bargain, as they did with Enron, Nortel, Fannie, Freddie, and Citigroup. The performance results are highly likely to be the same, or worse, because there are liquidity issues in real estate, and carrying costs, that don't exist in the stock market to the same extent. If you look at the action of public investors (who I've termed Elmer Fudd), they typically chase price except when the bull markets end in major assets. That's the one time they buy en masse on price weakness. They rush in and buy the initial decline, sure they have some sort of "super bargain" on their hands. The real estate market might not recover for several decades, and arguably the bear market there has only barely started. The ancient bull market in bonds will die at some point, as Helicopter Ben moves from Quantitative Easing to gold revaluation, as the crisis intensifies. Elmer Fudd has been told the economic crisis is over, when in fact it has barely started. The markets crisis is 10 years old. The economics crisis is a baby. When the bond market is abandoned by the Fed, you could see a full blown panic in the real estate market.
- That panic could lead to limits on bank withdrawals. All such action is ultra gold positive. Higher interest rates as a response to high economic growth rates are gold negative. Higher rates as a result of an implosion of the bond market are the ultimate gold positive, second only to all-out money printing and actual revaluation of the metal by the US Treasury and/or a massive coordinated central bank gold buy program.
- You have all heard the joke made when there's bad weather outside and the forecaster gets it wrong. "Look out your window, put away all the equipment, just look out the window and see the reality!" It's the same in the gold market. When you look at the price chart and you can't see any real decline on the chart, my question to you is, "why are you buying heavily when you can't even see a decline?" This mantra applies whether you are using a short or long term time frame. For one trader a $50 move is huge, but for another it's microscopic.
- When you look out your market window, you need to spend time thinking, "do I see any price rise here, because if so I better do some selling". The gold chart right now shows no significant price decline, so you need to wait till it does before ramping up your buys. Obviously my pyramid generator does that for you and forces you into that winning discipline. I would predict that by the end of this week, most of the "traditional buying season" for gold is forgotten and replaced with, "what's wrong here, how LOW is this thing going, I'm burning!" At that point you will be accelerating your buys, if it happens.
- If you don't feel discomfort when you are buying in size, you are making a major error, and odds are 99% you will feel a great deal of discomfort after those size buys go underwater, as they are, here and now, for the "traditional buying season" gang. The traditional buying season is better termed the "Traditional handoff from the funds and retail price chasers to the bankers right before gold takes off" season, and the question is:
- Are you prepared?
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