I want to start this post by saying I am 100% a gold bull, and expect 1300 to be breached probably by year end. However, no stock, commodity, forex, etc go straight up or down. There is a lot of analysis on why gold is a solid investment and people should be looking for places to get good entries. Well, July 28th was one of the good entry points however, this recent rally it is very hard to say it will continue to new highs. Why? There is a bunch of reasons but the one i will provide is that the gold market is in a corrective phase, and the recent dip at the end of July was the beginning, the recent increase will most likely break down to either the July 28th low or a bit below that. Then we are off to the races. Remember when this last correct occurs (if it does) will be the BEST entry point for anyone buying gold (physical, stocks, etfs). So that is the context of this discussion since it is based around the high chance gold is reversing.
Lets look at 4 scenarios right now.
1) Stocks Down, Gold Down
2) Stocks Down, Gold Up
3) Stocks Up, Gold Down
4) Stocks Up, Gold UP
When I refer to stocks I will be using the S&P 500.
First question should be has these moves ever occurred in the past? If not then we don't really need to consider them. There is a couple of examples of each but I will only mention one to save space / time.
1) Last crash, gold reach its low at $700. Between sept 29th and Oct 25th both stocks and gold dropped dramatically. This time period I am using because from my understand so far I think this is the most likely situation. This will provide an amazing entry point into the gold market.
2) Following the crash Gold rallied until March 2009 well the stock market retreated to its low at 670.
3) On Dec 1st 2009, there was a period where gold dropped dramatically and S&P rallied for a couple of weeks before it dropped off. Also in 2008 there was a period of this scenario on March 19th.
4) The rally after the massive stimulus March 11th, 2009 there was a months of gold rallying with gold.
So now we know each of these scenarios can occur, so why do i believe that shorting both gold and the stock market right now is the best call. First off, I am already "in the money" on my short of the stock market and will continue to hold this position until the market does move lower. So the question I have been wondering is why short Gold when I think the long term fundamentals are very bullish? For gold to continue to make new highs this correction is necessary, and will help propel the metal upwards. If you are interest in gold Elliot wave count I refer to the following.
http://www.youtube.com/watch?v=_BSOJ9hKbD4
Before I get into the technicals of why gold is showing weakness. Lets consider why this move is an awesome hedge for what ever is coming next week and the weeks after.
If stocks fall, and gold rallies the stop loss is very very tight, I have said this before to friends and i will say it again, trading from my 4 months of following the markets appears to be all about making low risk trades, some will work out some will not but the idea is stacking the odds in your favor is key. So with a tight stop loss, if the markets move down and gold moves up, I will lose about 1 % of my trade plus $10 commissions.
Lets say the Markets move up (maybe some crazy news will come out next week, more stimulus or recovery news), people may dump their recent gold positions since it has recently rallied take profits and look to the market. In this case, I have hedged my losses (same with the alternative case with market sinking and gold rising).
Now the only case I will be completely out of position is if the stock market rallies and gold rallies. Lets look at the economics right now. The hope of recovery has almost been completely dashed, 500K unemployment , housing not doing well etc. This situation doesn't really make sense for gold and the stock markets to rally together strongly. Gold is traditionally a hedge against inflation (Which I think is coming however a period of deflation right now is more likely), also people use it as a place to store money when fear enters the market, but to a lesser extend than the US treasury bonds. I believe there is a currency crisis coming however I think it is more likely to hit the Euro for the USD which means when fear enters the market people should run to treasury bonds initially, with mass sell offs in all other asset classes.
Gold will recover VERY fast just like in the 2008 collapses after gold dropped with stocks, stocks continued to drop while the recovery of gold took hold starting a major impulse wave up. That wave has ended and we are in the corrective pattern so a major move up after this drop is likely.
So a quick recap. I may enter a short position on gold if the price on monday doesn't GAP down huge not allowing an reasonable entry. Out of the 4 situations listed above, 3 of the I will be probability be better off, with the most unlikely situation (doesn't mean it can't happen) #4 being the only case I will be way out of position.
Lets quickly look a gold and technicals to see why today / monday could be the turning point.
So there are some bearish and bullish signals .....
Bearish:
MACD - A reduction of upwards momentum on Friday. Another tick that is lower than fridays would be pretty good confirmation.
Evening start - candle stick reversal pattern, see below.
http://www.candlestickforum.com/PPF/Parameters/16_540_/candlestick.asp
At the 78.6% retractment (providing a solid stop loss exit point if the trade is wrong.
Elliot wave - As mentioned in the video posted, this evening star reversal is indicative of gold reversals for almost all reversal patterns. A C wave down is predicted and should occur before the B wave gets to the top of wave 5. The C wave in theory should be lower than wave A however, gold is quite bullish long term and the economic climate might cause a double bottom where the C wave stops close to the A wave bottom.
Bullish
Moving averages are stressing me out, since I don't like predicting moves below them since they are strong resistance however, in the 2008 crash this was the exact situation before the drop in both gold and stocks.
Neutral
Slow stoch is technically embedded and could result in a locked in trend to the upside however, the momentum coming into monday is down, and if the yellow line gets below the 80 level we could see a sell off.
Anyways, I will be hopefully entering a position monday with an etf that tracks gold probably a horizen beta pro ETF.
Last thought, I am still thinking about if I should be trading in USD or CAN, since in theory, if everyone rushes to US treasury bonds the USD will rally strongly. However, I do believe CAN is very strong currency at this point but if the USD is use, I could basically get currency gains. I still have to think this through more, since I still believe with the Quantitative Easing occurring and probably continuing the USD will fall, I just don't think we are at that point yet.
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