We are Going to Move
Shorts are covering, little to no long spec positions exist, the dollar remains strong, global issues are now chronic, stocks are very volatile and the trade war with China is not going away overnight. Changing or simply raising awareness of any one of these and Gold moves fast and hard. The rubberband of relationships is stretching for gold. Volatility indicators say next week is very likely to be a range expansion week
Making Non-Sense and Sense of Gold’s Price Action
Gold’s behavior in light of the strong USD does not make sense historically. Yet gold’s behavior in view of prolonged EU issues does make some sense. Gold’s strength during this stock market correction does not make sense historically. That said, there are few spec longs and many shorts in the metal, which may be contributing to its resilience in the face of extreme stock volatility. Gold’s strength also does not make sense in light of Yuan trade war behavior. But last week saw the CNY give gold every reason to drop and it did not. That could be a function of China’s short term inability to reference the Yuan to both USD and Gold when setting prices. Here are some comments all three of those seeming contradictions
Volatility Ready to Exhale
The confidence in soon to be increasing volatility is based on our in-house VBS algorithm used for trading. Basically, Gold is again on our radar for a large and possibly whippy move. We say “whippy” because fakeouts are on the table before the true direction is picked.
Being on “the radar” for us means we are on alert for a trending move to begin if Gold closes a 4 hour bar above $1238.78 or below $1232.05. And if a breakout fails to materialize, those levels narrow. The radar doesn’t negate as volatility just coils more.
Given the signal is being generated on a 4 hour term, then it is highly unlikely we will have to wait more than a couple days for an alert. Thus, until an alert hits; no position is the right position.
Don’t Ask Which Way
We don’t know. Anybody who is looking for that can stop reading here. We handicap probabilities. Active traders usually put on positions based on perceived asymmetric probabilities, and remove them based on VaR. That is what we do anyway.
We have made several weekly macro calls in this space as recently as 2 months ago. Even though most of those situations have been accurate, (we have been on a hot streak), that does not mean prognostication powers lie with anyone. We expect to be right 50% of the time. We believe our “edge” lies in 2 things:
- Time: how quickly we are right or wrong frees capital and trading bandwidth to move on.
- Risk Reward: consistently risking 1 to make 2.
What can be banked on is this: Outside the range given above on a 240 minute bar close will unleash the Vol for a 4-16 hours. From there, it could snowball. So for us, that means either making sure we have 2 bites at the directional apple, or buying volatility and trading gamma.
Order Flow Patterns are Bullish Now
First, we have noted in previous posts the apparent surge in interest between the hours of 12:00 and 4:00 am ET US in Gold. For the last week or so, there is a definite pattern of Gold picking a direction during those hours. Most of the time it has been higher. Sometimes it has been lower with a violent reversal higher. And on at least one occasion, a complete selloff ensued. Based on observation and information we believe there has been a large order during those hours that has returned semi regularly. When it does, Gold goes higher. When it seemingly does not, Gold fishes lower until it finds either the buyer or no stops. On the 1 or 2 days the buy order was not there, Gold dropped.
https://www.zerohedge.com/news/2018-10-28/kiss-1235-goodbye-vol-visits-gold-next-week
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