A Bearish Tilt to a Gold and Silver Market – A Great Risk-Reward Setup

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A Bearish Tilt to a Gold and Silver Market – A Great Risk-Reward Setup

With analysts during many open bullion and silver websites now branch decidedly bearish, with a summer ennui staring us in a face, with a new rate travel lifting seductiveness rates (on paper creation bullion reduction fascinating as it provides no yield), and with a bullion seasonals suggesting that “sell in May and go away” was a play, there is a transparent bearish lean to a zone right now.  That’s given (among other things) we have a good risk-reward setup staring us in a face.

Pining thinks it’s a good place to go prolonged (with stops)!  Let me give we a few reasons why, then I’ll outline a trade:


A discerning examination of 7 renouned and publicly accessible changed metals analytics/trading sites, and a peek by a comments on those sites, done transparent to me that there is (at slightest roughly) a ubiquitous accord in a metals formidable right now: after unwell to mangle by 1300, and initial pulling by afterwards descending behind successive a long-term downtrend line in gold, a summer ennui are on us and accord view has incited bearish.  The dual many expected scenarios we saw discussed were presumably (1) we languish and shake reduce for a successive few months following standard bullion seasonals settlement into a Jul or Aug low, or we cascade from here into an progressing low, maybe late Jun or early July.

I like this widespread bearishness really much.  This is precisely a form of setup a metals love; wrong-foot a investing public, going opposite obvious patterns (because it’s never that easy in a metals) and creation certain a infancy of sell is not on a sight and has to follow price. That’s also given a so-so COT doesn’t worry me much, that settlement has been a bit TOO transparent recently and has been apropos a small too easy to trade, so we consider it’s due for a wrong-foot.  In fact it is this “juking a crowd” and successive chasing of cost on a approach adult that provides a fuel for a best runs in a metals.  This is an glorious setup from a view standpoint.  Just ask yourself, when was a final time a infancy of sell view was dead-on scold and on a right side of a trade in a metals?  Thought so.

GDJX rebalancing is behind us

Regardless of where we stood on a whole GDXJ/JNUG issue, a fact stays that it is now mostly in a rearview-mirror.  This means a genuine, poignant source of instability in a zone is now mostly behind us, stealing some of a unpredictability that had been a drag on both cost and sentiment.  Additionally, it is expected that income managers who competence have formerly been wavering to allot supports until this nonsense was sorted competence now be prepared to put that income behind to work, so bringing an astonishing tailwind that could assistance things to a upside.  If instability was a negative, afterwards fortitude should be a positive.  Bullish!

Crossing over of a 50,100, and 200 DMA on a Gold Daily chart:

Don’t demeanour now, though for all a groan and gnashing of teeth, bullion is about to see a 50 DMA above a 100 DMA above a 200 DMA.  This golden cranky setup is clearly timed to locate people off-guard given a bad view we see now, nonetheless will trigger buy signals for technical traders and algos.  With about 60% of batch “market” volume now quants, this is not immaterial.  With a large turnover in shares final week, generally a outrageous volume on Fed day final Wednesday (see black arrow on chart, demeanour during that volume level) and follow-up churning, there has been a poignant rinse in a complex. Lots of longs have been spooked out of their positions, and some shorts have lonesome profitably.  This indeed looks good to me, with Quad witching usually upheld on Friday, and utterly a Thursday and Friday follow-on action- no waterfalls, usually tons of repositioning.

The tinfoil shawl wildcard, though value a mention: Is a Fed schizophrenic or operative a plan?

Traditional research says that when a Fed raises rates, bullion cost craters.  Yet during this new cycle, when a Fed lifted rates Gold took off.  And conjecture what? The Fed usually lifted rates.  Short version-  Bullish!

Long version:  we indeed consider there is a reason for this counter-intuitive new movement in bullion when a Fed has raised.  Traditionally, given did a Fed lift rates, and when did they do it?  They lifted when a economy was removing prohibited and genuine fears of acceleration were holding hold, and they did so to cool-off acceleration and that prohibited economy by sucking liquidity into holds by aloft yield.  So with improved options (yield) available, bullion (which produces no produce and is an acceleration hedge) went down.  But recently, a Fed has lifted with (1) no genuine signs of inflation, and (2) and a honestly bad mercantile picture.  So bullion didn’t do what it customarily does, and in fact one could disagree that bullion was simply behaving another of a normal roles- that of a Safe Haven in times of uncertainty- given lifting rates into a bad economy is utterly presumably a recipe for a batch marketplace pile-up (given that a marketplace is in a rarely overvalued position historically).  In this context, bullion rising (insurance) when a Fed (stupidly) lifted rates indeed creates ideal sense.

Tinfoil Hat version: Has a Fed motionless to turn as partial of “le Resistance” like so many of a Washington investiture has, and is this a sign?  Before we boot me as a nutter, answer this elementary question: After 8 years of gripping what was primarily billed as “extraordinary measures that are historically rare and temporary” in place for scarcely a decade now, given has a presumably ‘data-dependent’ Federal Reserve unexpected usually hiked rates AGAIN during a time when mercantile information usually missed so badly? Again? And yes, the previous sentence showed how what a Fed once described as temporary is now permanent, what was once extraordinary is now standard, and how “data dependent” means ignoring a information no matter how bad it is.  This is perfect Schizophrenia. Or, we know, Central Banking.

The many new skip relocating a data-driven Fedsters to travel some-more was so large it was a misfortune skip in six years!  In fact, the final time mercantile information unhappy by this good a domain a conditions was counsel apocalyptic to such a grade that Bernanke unleashed “operation twist”… behind in Aug of 2011. So how is this rate travel in any approach judicious for a “data-dependent” Fed, absent a counsel vigilant to plod things up?

If a Fed were truly creation process as mercantile information dictates, they wouldn’t be doing this.  So given keep hiking rates into a dumpster-fire of an economy when they know could simply lead to a vital batch marketplace correction, crash, and/or retrogression during some indicate (maybe soon)?  Occam’s razor suggests: given they’ve motionless that’s what they want!  If we do A, meaningful it will substantially means B, that strongly suggests we enterprise B as an outcome.  Simple. Call me crazy all we want, though that reason seems utterly unchanging with a tinge and function I’ve seen entrance from a rest of a DC/government investiture for a final half year, so we don’t see given a Fed would be any different. When a feeding tray is threatened, some folks ‘resist’, some folks leak, some folks hike.  Potato, po-tah-to.

And if we consider a marketplace won’t be authorised to dump given it’s never authorised to drop, ask yourself WHO has not been permitting it to dump for a final 8 years?  The PPT/Fed.  And what are these rate hikes suggesting they competence wish now?  Ummm hmmm.

Regardless, don’t totally nap on a long-shot matter folks; a SP finally streamer south as a probable matter for gold…

Trendline test, arise above, and rejection:

One of a lessons I’ve schooled a tough approach in a metals is that trend lines are not what exemplary trade conjecture says they are.  In exemplary trade theory, a trend line should act as a psychological turn of support or resistance, and when (for example) cost rises afterwards bumps adult opposite it afterwards breaks through, it is ostensible to trigger a new call of shopping as other marketplace participants (seeing a strength of cost in violation by a barrier) join in a buying, pushing cost aloft (or of course, in some cases rejecting cost and promulgation it behind down).

But all that supposes giveaway and sincerely traded markets among participants of equal station before a law.  And these are a metals. HAHAHAHAHAHAHA!!!!!  So here, trend lines are places where, when insurgency is breached, once cost breaks by and attracts new buyers, THEN a marketplace “makers” vanquish cost with an avalanche of paper to collect all that new income that usually came in. Ring a register, bank a bonus.

So a approach trend lines work in a metals is that cost bumps opposite insurgency or trend lines, and if it goes by bringing in new longs, THEN it gets crushed behind down below, and usually when everybody who usually got run has presumably been privileged out or turns bearish will cost finally be authorised a probability to arise behind adult by that line during some point.

In other words, in a metals, trend lines are usually current indicators after a gang-rape has occurred there.  We’ve now had that in bullion (twice, actually), so in my book, we are finally transparent for a arise adult by 1300.  Strange?  Yeah, though that’s how it works around here.

The Bottom Line: Risk vs. Reward

In a end, all of a above is usually food for thought, or fun speculation.  As a wizened virtuoso of a trade pits atlee once said, “That’s a good story.  Ms. Market doesn’t caring about your story, she will go where she wants.”

This is a elementary range-trade with well-defined risk vs. reward.  You take a famous trade range, buy-in nearby a new low of that trade range, and use that as your stop- it’s a elementary play, regardless of either any of a above winds adult being a matter or not.  Right now, GDX is usually above a new lows of May, so we have a really transparent and recently tangible low. We need to make a aloft low above this turn if we are going to continue relocating up, so there is your well-defined stop-loss level.  GDX is around 22, and 20.75 would be my stop-loss for this trade… we go successive that, a trade is busted, so get out (FYI, we find that bullion and china are gamed so many day to day that environment stops, entries and exits around GDX is many some-more arguable and predictable, even if a vehicles we am trade are bullion and silver).  A tight, well-defined 5-6% stop-loss if you’re wrong is acceptably low risk IMO.

But a reward… if this takes off like we consider it could, we would at least revisit a highs of GDX 31.5 of final summer. The protected play would be to take 50% increase nearby that point, afterwards wait for marketplace movement to confirm further, though we think it’s probable that a movement generated by a arise from 22 to 31 would meant that longhorn competence really good keep using until we strike a 36, and presumably on a outward a 40-42 range. But let’s stay regressive (recent range-bound) in a calculations and hang with a 31.5 figure- that would be an unleveraged benefit of 43%.  Put another way, that’s a risk/return ratio of 7.7 to 1 on this trade.  (Best Borat voice) Verra Niiiiiiiice!!!! And if it keeps rolling to 36 or even 40? Ka-ching!

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So we can have your summer doldrums, your new lows, and your bullion seasonals.  This parrot, with trained stops, is going long. – Pining 4 a Fjords

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