The Gold Sandwich. Chew Carefully.
Dec 4, 2012
- “High-Speed Trades Hurt Investors, a Study Says” – CNBC news headline, December 4, 2012.
- When everything around you becomes more complex, you can try to employ more complexity yourself, to compete, or step back from it. High-frequency trading (HFT) is a very complex approach to markets.
- Computer programs are used to try to make just pennies or a few dollars on a highly leveraged futures contract trade.
- HFT traders take on a lot of risk, to make just a small amount of reward. If you don’t have any HFT programs in your trading arsenal, perhaps a much simpler approach to the gold market is required.
- Please click here now. You are looking at the daily chart for gold. There is substantial horizontal support and resistance (HSR) in the $1540 and $1800 areas.
- If I could give this chart a name, I would probably call it the “gold sandwich”. There is a lot of “filling” between the two pieces of “HSR $1540 and $1800 bread”.
- You can use technical and fundamental analysis to guess where gold will move to next, between those two HSR lines. Unfortunately, that is what the HFT program traders are trying to do, and they are very good at their job.
- Until gold rises above $1800, or declines to $1540, I would not place much risk capital into the gold market, regardless of whether you own a lot of gold, or only a little bit of it.
- Please click here now. There is light support for gold at $1707, $1675, $1650, $1635, and $1600, so it is reasonable to place tiny bets on gold and related items, in each of those areas.
- The HFT traders will likely be the biggest winners on trades placed around these “light HSR” zones, because rallies that occur from such price points tend to be small and erratic.
- In contrast, rallies that commence from areas of massive HSR, like $1540 and $1800, tend to be quite substantial. The trend-oriented investor who applies risk capital there, is likely to dramatically outperform the HFT players.
- Please click here now. Unfortunately, this simple daily gold chart shows you that a key uptrend line was broken, $1707 HSR gave way, and the round number support of $1700 failed.
- Technical traders often place a lot of stop-losses and short sale orders just below such uptrend lines, and that can bring substantial volatility to the market.
- While stronger hands in the gold community are buyers of such breakdowns, it is often not enough to overwhelm the technical sellers, many of whom are leveraged.
- Also, while the larger commercial traders tend to be buyers of trend line breaks, they often bid for for less gold than is offered by panicking traders, who face margin calls.
- Their reluctance to bid for all the gold that is offered can produce even lower prices. Many central banks have active gold buy programs that provide support to the market, and it often comes just when it seems that gold will never stop declining.
- I believe that gold is coiling here, and it will soon surge through $1800. That would breathe some much-needed fresh air into the gold stocks sector.
- If you are relatively new to the gold market, and did not have the opportunity to buy anything into the $1540 area, it’s important not to let the bullish big picture for gold make you act unprofessionally, particularly when selecting entry points.
- Gold declined to the $1675 light HSR area a month ago. If it falls to $1675 again, only a tiny amount of risk capital should be used to buy gold.
- Please click here now. That’s the daily chart for silver, and it is doing quite a bit better than gold right now, especially considering the increasing amount of “tax loss” selling occurring in the general stock market. I expect the nervous liquidation of general equities to accelerate, and silver’s outperformance to accelerate, too.
- The jobs report is due to be released on Friday morning. Gold often sells off during the week leading up to that report, like it is now.
- Many bank economists are reporting a drop in corporate profits and industrial output, while employment has been rising.
- Institutional investors had initially hoped that the recent increases in employment were indications of a strengthening economy, but the consistently weak profits and industrial output opens the door to a bad jobs report this week.
- If the report is bad, gold should reverse course and make a charge towards that important HSR at $1800!
Dec 4, 2012
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