Gold - using implied volatility to find high conviction entries

PEPPERSTONE:XAUUSD   Gold Spot / U.S. Dollar
XAUUSD is testing the August 2020 downtrend and requires a close above 1850 to get the bulls excited – if gold is going to have a more explosive upside move it requires far greater involvement from CTAs (systematic trend-following funds) and FOMO buyers.

The near-term flow has been bullish , but the long-term downtrend could be an area of greater supply – a closing break, therefore, could be powerful.

Looking at overnight options implied volatility in XAU I see this sitting at 19.3%, which is elevated and at the 70th percentile of the 12-month range – if we equate this into the implied move the market is seeing on the day, it relates to a $17 move (higher or lower) - we can then project that onto the current price and see the expected range on the day with a 68.2% level of confidence – I’ve marked this range ‘1’.

We can double this to get a 2 standard deviation daily move – where the market sees a 95% chance price will be contained on the day – I’ve marked this ‘2’.

Certainly, any outsized moves, which would be driven by a surprise from the Fed, and these are the high conviction levels to lean against and look at mean reversion/counter moves intra-day. The FOMC playbook is clearly diverse, but a market that senses the Fed have greater concern for the recent tightening of financial conditions, or questions the 4 hikes that are priced into the fed funds curve for 2022 and XAU should push towards 1866 – where the market feels fairly confident it shouldn’t breach – this marries up between R1 and R2 on the pivot points .

On the downside, should the Fed beat hawkish expectations and promote a rally in the USD and real rates, and we could be headed for 1830 - the low range of the straddle, which marries nicely with horizontal support (blue line) at 1830 – look for buyers into here as an intra-day mean reversion trade. The big conviction comes in at 1812 though, where I’d expect a decent bounce intra-day.

While we can use Bollinger Bands and other statistical levels of volatility – using implied vol and where market makers have levels for clients to buy/sell vol has a certain science to it, and we can use it as a forward-looking guide for movement, with different confidence levels.


Support 1 – 1830
Support 2 – 1812 – high conviction intra-day low

Resistance 1 – 1866
Resistance 2 – 1882 - high conviction intra-day high


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