NEW YORK (
) -- As a trader and a broker, I have always been amazed at how quickly the retail crowd pronounces a move over. It is this mentality that I believe costs many retail traders a lot of money.
One has to always keep in mind the bigger picture. Such is the case with gold today, in my opinion.
Going back to late August, gold has been the talk of the town. Every time you turn on any financial program, someone is talking about gold. The notion of $2,000-an-ounce gold has become widespread, in fact, to such a degree that I have to look at it in a bearish light. After the breakout from the previous trading range, I feel like this market got too bullish too fast. What happens when everyone gets on one side of the boat? That's right -- it capsizes.
Now, don't get me wrong, I do not think this market is done by a long shot. I believe there could be a tremendous amount of upside, especially in the longer term. One must keep in mind, however, that the market's job is to shake out the weak hands.
In this case, I believe that gold is simply "shaking out" some of the weaker longs before making another run at resistance and possibly going much higher. Let's also not forget that this market covered a lot of ground in a short period of time. In my experience, markets do not go straight up or down, and gold is no exception. I look at current price action as more back-and-fill trade, nothing more.
Regarding the little selloff we saw yesterday? Well, I think it's clear that many sell stops were clustered below the lows of the recent range around the $1,760 area, and when that area was violated --
-- sell stops were being triggered en masse, driving prices lower.
So where does gold go from here? Here is how I am viewing this market. I would expect gold to continue to be vulnerable to downside pressure as more weak longs get taken out. The market is trading below the 20-day exponential moving average (EMA) and, as of this writing, is testing the 40-day EMA. This level also coincides with a 38% retracement of the upmove. This could prove to be a great buy here -- time will tell.
Once again, given the distance gold covered to the upside, I have to lean toward some more downside before the market is ready to power forward. I will be looking for a test of the 50% retracement down around $1,709. This level also coincides with the 50-day simple moving average (SMA) coming in around $1,713.
In addition, on the weekly chart, the 20-period EMA comes in around $1,700, and this level has acted as support and resistance in the past. In a nutshell, this area has more reasons to look to be a buyer in it.
And, in my opinion, the more reasons to make a trade, the higher the odds of success. Patience pays. Now, people have different ways of trading, and different comfort levels in terms of risk/reward, etc. One does not necessarily have to park buy orders down at these levels. Certainly that could potentially lead to a slightly better entry, but overall if the market does what I think it is capable of doing, waiting for confirmation before entering will not make that big of a difference. By waiting for confirmation, I simply mean watching how price acts at those levels if we get down there. The market is always leaving clues; one just has to learn what to look for.
Look at how volume behaves down there. Is size coming into the market or is volume shrinking? Are we closing in the lower, mid or upper range for the day? Does price spend some time consolidating there? Once the area has been tested, if it holds, that can potentially trigger a great buy signal.
One can, of course, buy futures contracts, but in this case I think options could be useful. After the market has worked to the downside a bit, call options become cheaper and cheaper. This makes the cost of participating cheaper and, therefore, one has to risk less money on a trade if they are purchasing call positions. On the flipside, I would also perhaps look to be a put seller at this area. As always, feel free to contact me for details on potential trade setups.
Please note: Futures and options trading is inherently risky and isn't suitable for all investors. Past performance isn't indicative of future results. Stop-loss orders meant to limit losses may not be effective because market conditions may make it impossible to execute such orders.