Straight answer. In terms of Quantisi Funds’ books – yes – but this is educational and not investment advice, please note.
Daily gold chart
We have looked at the USD weighted currency basket index, some currency pairs like USDJPY and now let’s take our first look at the commodity gold, ever popular as a place of safety and growing value for investors.
My theory is as follows, and it could be completely wrong. This post does not constitute trading advice, investment advice or a recommendation. It is purely for educational purposes.
Based on what we have looked at so far, let’s look at the Daily chart for gold vs the US dollar over the last month or so, focusing in on what happened over Christmas week, and I will share my trade, before the result, and then we can see if I had the ‘Golden Finger’ on this one later.
Note that because of controlled risk management, it really does not matter a jot whether this trade works out, unless, e.g. a few billion tonnes of gold fall out the sky and the price of gold experiences such a terrific downfall that my stop order won’t get filled.
Why do I call long gold? The crystal ball bit first. Stocks have been rallying to all time highs since 2008 and particularly since Trump. Yet he is making diplomatic faux pas left, right and centre and suggesting policies that won’t be good for trade with China, a major trading partner for the US. Companies will suffer, so I am assuming some correction in stock markets in Q1 2017. This story supports my gold trade if economics and stock markets do follow this pattern as a bear market in stocks will see finance going into traditionally safer assets, like gold.
But for the most part this trade is technical and it is also strictly contrarian. Firstly, take a look at the chart above.
Clearly, since about September, gold has been in a strong downtrend. There was a spike up on US Election Day, but after Trump was elected, investors have continued to be selling gold (and buying stocks). We have now come to year end and clearly there has been some profit taking by speculators.
What I find particularly interesting is the fact that the last week (Christmas week) has been the strongest week in just over one month for gold.
Go all the way back to the spike and trade the price action forward and you won’t find a stronger series of days for gold than Monday to Thursday of last week.
There was also news out that a sizeable order (to the tune of around $3.5 billion) was placed at the close of play (10pm Eastern time) on Thursday.
It is quite likely that investors will have rushed in on that on Friday only to be disappointed by the lack of follow through on Friday.
Here is where patience could pay off – Quantisi Ltd placed a pending order at the 50% retracement of Thursdays candle.
If the price would have continued to run away, the trade would have been lost. In this instance, the market on Friday retraced almost to the tick, to 50% of Thursdays range.
The idea behind this trade is that there has undoubtedly been a strong move up. We’ve waited for a retrace but are expecting a continuation of that upmove, based mainly on the strength of the move last week, perhaps backed up by the very general crystal ball on stocks and the mysterious big order as well, but mainly the principle that the market tends to repeat itself and a move up may well be followed by another move up of a similar distance, for instance.
This is a contrarian trade, for sure though. All of the average lines on the chart pretty much are pointing down and the trend has clearly been down. But, crucially, the 8 simple moving average has certainly turned up it would appear and will undoubtedly offer support (the white line on the chart). The fact that recent price action has ‘turned this average up’ could well be a clue to a change in trend…
It is always risky ‘guessing bottoms’ on the other hand, but in some sense this guess is educated and one must take a risk in order to gain a reward.
Stop loss placement.
The first logical place to put a stop is below the low of Thursday’s candle, then Wednesday’s, etc.
I am confident of a follow through (else why take the trade) but not confident enough to risk more than is comfortable. At the same time I want to give the trade plenty of room, without giving it so much room as to absorb unnecessary losses when the idea has clearly failed.
I have therefore placed a stop below Monday’s low (the weekly low of last week) and am targeting 1.5 to 2 times the distance from my entry to that stop loss, to the upside, at least. I have had to scale down my position size accordingly.
If the trade really gathers steam though, I think with some volatility on the way up, it could see 1250.00 in an extended move, at least. For now though, I want a conservative 1:1.5 risk to reward to be hit and then I can consider options for scaling up, locking in profit, risk free trade and so on.
There is plenty of resistance above (pretty much all that spaghetti on the chart could act as resistance).
But, it is a New Year and last week has suggested renewed interest in the commodity. It should be interesting to see how this trade plays out, with any luck, highly profitably. To be continued…
An interesting article to go alongside this post is here: