Fear And Greed Explorations: Unwind Of The Dollar/Gold Trade

“The difficulty lies not so much in developing new ideas as in escaping from old ones”- John Maynard Keynes

Gold Scoreboard: 5 Day: 2.51%, 1 Month: -0.65%, 3 Month: 8.12%, YTD: 6.44%, 1 Year: -2.24%

The ideas of March refers to the 15th of March. It is the date which marks the assassination of Julius Caesar, but in 2017 it marks the day that shorts, looking to exploit the rate hike, were assassinated. On March 15, 2017, the Federal Reserve raised its target federal funds rate by 25 basis points to a range of 0.75% to 1.0%. Anybody who looked to short gold upon the announcement quickly found themselves on the wrong side of the tape. Over the course of the 15th, gold went from $1,200 to $1,225 an oz. The consensus says that the price action witnessed on the 15th occurred because large speculators where playing the rate hike by going long the US Dollar and short gold ahead of the hike. Thus, speculators sold their US Dollar positions and covered their shorts once the actual news of the hike materialized.

This isn’t the first time that this sort of action has been seen. For example, gold jumped higher on the December 16th, 2015 when the FED announced a .25% hike in the Fed funds rate. If history repeats itself then the gold bulls are in for greener days ahead. After the December 16 th hike of 2015, the GLD (NYSEARCA: GLD) went on to rise 26.7% over the following seven months. Furthermore, strong appreciation in gold was seen after the 2016 rate hike, which can be witnessed by examining how the GLD performed after the hike. The GLD rose 10.9% over the next two months. March is historically the weakest month for gold and real strength typically isn’t seen till August and September, but perhaps a new run is ready to begin after the most recent pullback and pop higher. I don’t think fundamentals are helpful over the short term, but the long term backdrop of the FED being cautious in not wanting to get ahead of inflation will be a positive for gold because of what that implies for real rates. Anybody interested in the factors that affect the price of gold and to what extent each factor plays a role can read an article that I wrote covering the subject here.

(Chart shows December 1 st, 2015 to March 1 st, 2016. The circle highlights December 15/16 of 2015.)

The COT Report

I think COT reports are much more useful when put into a historical context. Thus, I want to see how bullish or bearish the most recent reports are relative to the most bullish and bearish positioning over the preceding 5 years. A reading of 100 would represent a given group being more bullish than they have ever been over the past 5 years and a reading of 0 would mean that their current position is more bearish than they have ever been over the past 5 years. The prior report had both commercial producers and users in the 47th percentile. However, the most recent report shows commercial producers/users in the 52nd percentile and speculators in the 41st percentile. These are middle of the road readings so they are not highly useful. Essentially, both commercial producers/users and speculators are saying that gold is neither particular cheap nor expensive.

A great example of just how useful this analysis is can be seen by applying it to the oil markets. On February 24 th, 2017 WTI was at $53.99 per barrel. An examination of the COT report showed that commercial producers/users positioning was in the 9th percentile, which meant that they thought oil is expensive. Producers wanted to hedge and sell at that level and users weren’t looking to lock in those prices. At the same time speculators where nearly the most bullish that they had ever been, over the past 5 years, with a reading in the 98th percentile. WTI crude is currently down 10.6% since the extreme positioning that occurred on the 24th of February.

Ichimoku Cloud analysis

Note: I will make statements about the short- and intermediate-term outlook. This series is geared towards market timing so short-term refers to a couple of weeks and intermediate refers to a couple of months.

(The chart is of a 1 year timeframe)-Tenkan-sen= yellow, Kijun-Sen= blue, Span A= yellow, Span B= blue, Chikou span=grey)

In my last article I stated how I needed to see the 113.35 level to hold in order to see the uptrend continue. The ETF only got as low as 114.02. The chart above shows one of the big reasons why I utilize this form of analysis. The Kumo, the green/red cloud, is a dynamic depiction of support and resistance that accounts for the volatility of the security. As you will note, the ETF touched the edge of Span A, the yellow line that outlines the cloud, and responded to this level by bouncing off of it. It only broke into the cloud for a brief period on an intraday basis before heading higher. Certainly the unwinding of the FED hike based trades helped to cause this price action because otherwise we would have probably penetrated deeper into the cloud. As of now the trend is still bullish, with the price above the Kumo, but I would say weakly bullish. The Kijun-Sen, slow moving average, is above the fast moving average and the Chikou Span, the lagging indicator, has not confirmed the trend due to its positioning relative to past prices. The Tenkan-sen, fast moving average, has started to curl upwards, which means it’s currently on a trajectory to make a bullish crossover. However, the space between the two moving averages is considerable so the crossover isn’t imminent.

So what does this all mean? Well at first blush I think retail speculators are liking the setup and are thinking of making a play towards the 120 level. However, I don’t have the moving averages where I would like them, as far as their relationship to each other, and the lagging indicator is close to confirming the trend but is not quite there. I could easily see gold going higher based upon the analysis, but I would like to see some consolidation built out around the 117.27 level before a push higher. This would give time for all the indicators to line up, which implies a higher probability of a successful speculation and would make me feel more comfortable with the 117.27 level acting as a true level of support. The GLD often moves in an erratic fashion. Thus, I only speculate in the GLD when all the technical factors line up, there’s a nice range to play, and the current price is hovering around a strong level of support so that my defined risk to the downside is minimal. I think most people fail at speculating in the GLD because they either considering factors that are not useful for the time period that they are operating in or they simply do not have the patience. Thus, they take too many setups that look nice, but statistically speaking are coin flips.

Support/Resistance

Next level of major resistance- 120

Major support- 115.51

Minor support- 116.51

Moving Averages

((The chart is of a 1 year timeframe) –moving averages: red= 5 days, orange= 9 days, yellow= 13 days, green= 20 days, blue= 50 days, purple= 125 days, grey= 200 days)

The chart depicts the bulls in control with the current price being above 6 of 7 critical moving averages. When it comes to the GLD, historically speaking, the 125 day moving average is short enough for you to get an early entry into prolonged moves to the upside yet is not so short that you get a lot of false positive entry signals. The critical thing that I’m looking for is to see the price break above the 200. The setup is almost identical to the one I outlined on February 26th, 2017. Once again I’m looking to see if the price can rise above the 200 day moving average, which is currently at 120.27.

MACD Provided for Further Context

MACD: The signal line is above the base line, but the base line is below zero and I don’t like to see this. This is due the mathematics behind the MACD and what such a positioning implies. Essentially, the 9 period, I use a 5,13,9 MACD, EMA of the MACD is still a little bearish.

The Bottom Line

Overall, things are looking good for the bull case, at least over the short term, and certainly the past appreciation following a rate hike would imply further gains. However, a high probability trade does not exist currently, but it does look like a nice trade on the long side might be developing fairly quickly.

Author’s note: To get more investment ideas like this as soon as they are published, click on my profile and hit the big orange “Follow” button and choose the real-time alerts option. I write about various topics, but I have a particular passion for biotech equities and gold.

My latest activities: I will be posting brief notes on my instablog when I see interesting speculations. I’m doing this because big winners often develop so fast that I can’t write and publish a detailed article in time for readers to be able to capitalize. For example, my last post detailed why you should consider buying Protalix BioTherapeutics (NASDAQ: PLX) and the next day it ran over 20% and in the same post I said that Catabasis Pharmaceuticals (NASDAQ: CATB) was a gap fill candidate and the next day it went up over 60%. I enjoy the community on Seeking Alpha and I’m excited to continue to help people build their brokerage accounts. Thanks for reading and good luck.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.