Gold has had a rough go of late, but there is mounting evidence that not only is the downtrend near it's end, but we could be setting up for a sizeable rally. Here is the setup:
1) The COT report is tipping us off to a bullish undercurrent that is hidden by the weak technicals... I score participant activity and net position over a 18m + 5yr basis factoring in a volatility component, and right now the swap Dealer net position of +21k scores a 98% on a 18m basis and 95% on a 5yr basis. But here is the key point.. The Scumbag Swap Dealers are actually net long Gold while all of the trend following algos are piling on shorts into this $100 decline.
To further illustrate how rare this, since the inception of the Disagreggated Report, there have been 578 weeks reported & the "SB" (scumbag) "SDs" (swap Dealers) have been short 550 of them, or 95% of the time! The 28 weeks where they have been net long comprised of 3 periods:
A) Oct 2011 - Gold rallied from a low of 1,653 to a high of 1,861 - Good for $200 +
B) July-Aug 2015 - Gold Rallied from a low of 1,096 to a High of 1,215 - Good for $120
C) Mid Nov 2015- Mid Jan 2016 - Gold Proceeded to rally from 1,069 to 1,396 - Good for $325
D) July17-??, Gold Rallied ...???
2) Since 1974 Gold sports an impressive 54-30 W/L record - 64.3% winning % during this time. I trade technicals as much as the next man, but as a trader you are really doing yourself a dis-service if you don't try to learn everything you can about the instrument you trade.. How/Why would Gold outperform like this? Is it a statistical Anomaly? The answer is a resounding No.. Where is the greatest demand coming from for the Phizz? Why the Sept timeframe for all of this demand? Still not sure, I'll give you a clue - It rhymes with "Cannoli"
3) There is extreme statistical outperformance when the SBSDs go long gold.. Since 2011 there have been 1,630 Trading days roughly and the 70% percentile move over 20days from any random close is: up $19.16, while down is $21.80. Meaning that if you placed a bet on gold every day at the close you would see it up at least $19.16 70% of the time, and down at least $21.80 70% of the time. You effectively have a coin flip proposition.
However, During the periods of Swap Dealers being long, the 70% percentile move tilts to a outrageous up $35.36 vs down $13.96 - So we are getting almost 3-1 pot odds to make this call, and this is exactly what we are going to do.
Warning - We are still currently in a clearly defined daily downtrend. And the COT is never a trigger to trade entry - So technicals must be respected. It is entirely possible that gold continues to ooze lower over the next few weeks, so you may want to wait for your favorite short term trend indicator to turn bullish before entering. Or you can simply do this:
1) Go Long Dec Gold @ 1,225 (We are seeing the first bout of higher highs and higher lows on the hourly bar chart as of time of this writing since the 1250-60 range 3wk ago)
2) Buy the Dec 1,220 put for approx $32.70
Next step is similar to an option route in football. Gold will do 1 of the following in the next 20 or so trading days - It will Trade Higher by $25, or it will trade lower by $25.
If it trades down $25, sell the Dec 1,150 Put - You will get approx $17 for this and will now have a 1220-1150 Put spread for a net debit of $15. Also sell the $1,300 call - You will get approx $8.50 for this. You now have upside to $1300, are covered to 1150, and it costs you $7.20
If it trades up $25, sell the Dec 1,300 Call - You will get approx $17 for this, and then sell the 1150 put which you will get about $7 for. So same situation as above except it costs you about $8.20
Your Max Loss is $5 on the future + $8 on the hedge = Total Risk $13.
Your Max gain is $75 on the Future - $8 on the hedge = $67 which gets you to 5-1 risk reward and we have 139days for this trade to work.
Good Trading to all
1) The COT report is tipping us off to a bullish undercurrent that is hidden by the weak technicals... I score participant activity and net position over a 18m + 5yr basis factoring in a volatility component, and right now the swap Dealer net position of +21k scores a 98% on a 18m basis and 95% on a 5yr basis. But here is the key point.. The Scumbag Swap Dealers are actually net long Gold while all of the trend following algos are piling on shorts into this $100 decline.
To further illustrate how rare this, since the inception of the Disagreggated Report, there have been 578 weeks reported & the "SB" (scumbag) "SDs" (swap Dealers) have been short 550 of them, or 95% of the time! The 28 weeks where they have been net long comprised of 3 periods:
A) Oct 2011 - Gold rallied from a low of 1,653 to a high of 1,861 - Good for $200 +
B) July-Aug 2015 - Gold Rallied from a low of 1,096 to a High of 1,215 - Good for $120
C) Mid Nov 2015- Mid Jan 2016 - Gold Proceeded to rally from 1,069 to 1,396 - Good for $325
D) July17-??, Gold Rallied ...???
2) Since 1974 Gold sports an impressive 54-30 W/L record - 64.3% winning % during this time. I trade technicals as much as the next man, but as a trader you are really doing yourself a dis-service if you don't try to learn everything you can about the instrument you trade.. How/Why would Gold outperform like this? Is it a statistical Anomaly? The answer is a resounding No.. Where is the greatest demand coming from for the Phizz? Why the Sept timeframe for all of this demand? Still not sure, I'll give you a clue - It rhymes with "Cannoli"
3) There is extreme statistical outperformance when the SBSDs go long gold.. Since 2011 there have been 1,630 Trading days roughly and the 70% percentile move over 20days from any random close is: up $19.16, while down is $21.80. Meaning that if you placed a bet on gold every day at the close you would see it up at least $19.16 70% of the time, and down at least $21.80 70% of the time. You effectively have a coin flip proposition.
However, During the periods of Swap Dealers being long, the 70% percentile move tilts to a outrageous up $35.36 vs down $13.96 - So we are getting almost 3-1 pot odds to make this call, and this is exactly what we are going to do.
Warning - We are still currently in a clearly defined daily downtrend. And the COT is never a trigger to trade entry - So technicals must be respected. It is entirely possible that gold continues to ooze lower over the next few weeks, so you may want to wait for your favorite short term trend indicator to turn bullish before entering. Or you can simply do this:
1) Go Long Dec Gold @ 1,225 (We are seeing the first bout of higher highs and higher lows on the hourly bar chart as of time of this writing since the 1250-60 range 3wk ago)
2) Buy the Dec 1,220 put for approx $32.70
Next step is similar to an option route in football. Gold will do 1 of the following in the next 20 or so trading days - It will Trade Higher by $25, or it will trade lower by $25.
If it trades down $25, sell the Dec 1,150 Put - You will get approx $17 for this and will now have a 1220-1150 Put spread for a net debit of $15. Also sell the $1,300 call - You will get approx $8.50 for this. You now have upside to $1300, are covered to 1150, and it costs you $7.20
If it trades up $25, sell the Dec 1,300 Call - You will get approx $17 for this, and then sell the 1150 put which you will get about $7 for. So same situation as above except it costs you about $8.20
Your Max Loss is $5 on the future + $8 on the hedge = Total Risk $13.
Your Max gain is $75 on the Future - $8 on the hedge = $67 which gets you to 5-1 risk reward and we have 139days for this trade to work.
Good Trading to all