GOLDReport
February 7, 2008
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What Now...
As expected, the rate cut euphoria has already worn off. "Suddenly" the financial markets are very concerned about the lack of liquidity in the economy. It's almost funny; maybe tragic is a better word.
The "next shoe to drop" appears to coming in the way of credit card debt. Interest rate increases on credit cards are now taking place. Rates jumps of 3% or more are becoming common. Given that many Americans are overly burdened with credit card debt, expect this to soon become a headline issue.
Inflation...
Gold and silver are once again being forced to adjust to a number of issues:
Grain prices are setting record highs.
The US Dollar may have bottomed out against a number of key currencies. This doesn't mean it has to rally a lot. Rather it means the Dollar may be through falling and will drift sideways to higher in the near term.
Crude Oil prices are drifting lower, as traders worry that the US economy is going into a full blown recession.
Stock prices are collapsing again.
Interest rates are falling once again.
Seasonal Gold Trend
Let's look at the Historical Gold Chart below
Over the past 15 and 34 year periods, gold typically rallies into late January and peaks out in early February, bottoming out in March. I see little in place now to alter what has historically taken place.
Gold did have a chance last week to buck the trend and move higher. April gold attacked its contract high this past Friday but quickly reversed down after failing to make a new high. Within 3-days it lost nearly $53. I believe that a short term high is now in place and would look the spike in the above chart into early February as having already taken place. Prices may have peaked out for the next couple of weeks.
April Gold
Last week I recommended taking a position in an April Gold Call Spread. Those that followed my recommendation put the spread on in the morning and liquidated it by the close. I don't recall ever being in and out of Call Spread that fast.
My technical analysis turned that fast. Let's see why.
The gamble as I saw it last Thursday was for gold to simply "hang in there". All that prices on Friday had to do were to close higher or near unchanged for Stochastics to embed. Embedded Stochastics are one of the strongest and most reliable technical trading tools I know of.
When an Embedded Stochastic develops, it means the trend is getting stronger in the direction the market has been going. Last week that meant the odds for higher gold prices was in place, as April Gold was approaching its contract high and needed but one more day of positive price action for Stochastics to embed.
On Friday prices had what is called an "Outside Day Down". Price action took out both Thursday's high and low and closed lower. In the process, an embedded Stochastic was denied, which left gold in an overbought condition. As such, a move down was in the cards since that is how overbought conditions typically correct themselves.
As you can see on the above chart, prices did what they had to in order to alleviate the overbought condition. Prices broke.
In my opinion, the market will enter the process of looking for a zone to bottom out at and once accomplished develop at least for the near term, a trading range. Given that historically speaking the seasonal trend doesn't bottom out until March, I think we alter, at least for the time being our previous highly aggressive bullish stance.
Yes, I am still bullish. However the chart action isn't, so we alter our strategy and look to see what the market offers up going forward.
I receive a lot of questions on how I use Stochastics in my price analysis. I teach how I use them in my trading course called The Futures Academy. I've created a short video that explains my teaching style. In the video I speak about The Futures Academy and the indicators I use in my trade analysis. You can click on the image below if you are online or simply type the link address below the video image into your web browser.
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Conclusion and Recommendation
Here's what I wrote last Thursday. "If Stochastics embed, I think a long position in April Gold is warranted. In fact, a move over 934.0 on Friday will be a signal for a test of the contract high of 942.2."
As it turned out, Friday's high, now the most recent high was $941.8.
Right now prices are looking for an area to bottom out at. On Tuesday a low of $888.4 as hit. There is downside bias and at this moment no reasonable risk-reward, at least the way that I read charts, in gold.
So what do I recommend? The answer is simple. I watch to see where the next opportunity shows itself. Right now, I don't see one but expect that will soon change and will keep all advised in my twice daily comments that I send out by e-mail and post on our website.
Silver
Let's spend a moment or two looking at the Seasonal Chart Silver.
As you can see, unlike gold, silver historically speaking rebounds into mid-February, but often falls at month end. From there prices tend to move higher into May.
It is that move that we should focus on, using May Silver Call Spreads when we see an opportunity to do so.
Last week, Stochastics in the March Silver were embedded.
Here's part of what I said last week and what I recommended you do.
"When Stochastics leave their embedded status it will be time to be fully out of your long positions."
As you can see on the chart below, Stochastics lost their embedded status on Monday February 4, 2008. As they did I recommended that traders liquidate their remaining long call spreads, which turned out making a profit of approximately 9 to 10 cents per spread.
Recommendation
I expect silver to stay stronger than gold in the near term. Copper is doing the same.
The question is one of where to enter long Call Spreads. I intend on doing so in the May Silver Contract, but don't have an entry point in mind just yet.
Look for a recommendation very soon in my Twice Daily Market Report.
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