Is There Potential Support for Gold at These Levels?

Aug 16, 2008: 11:04 AM CST

I’ve you’ve been following gold prices lately, you’ve noticed the precipitous plunge from the 1,025 per ounce high made just earlier this year.  Rather than getting ultra bearish at these levels, let’s consider the possibility that a bounce may occur, or at least that gold prices are at critical ‘make or break’ short term price levels.  Let’s use a few new tools to see what could be in store.

Gold Prices Weekly, using two Fibonacci Retracements:

While one could get better results focusing on longer term Fibonacci retracements, let’s look at two possible levels on the weekly chart.

First, if we take the 2006 breakout low (around $560) and then trace that to the $1,025 high (this is the RED grid on the left side of the chart), we note that gold paused first at the 38.2% retracement at $852, before heading higher.  Gold is now testing the 50% Fibonacci retracement from this move, at $797, and actually has broken slightly beneath this level.

If we take the 2007 price breakout low (blue grid on right side of chart), then we see that gold has already failed the 50% retracement and is now testing the 61.8% retracement at $791 per ounce, which is just below where price closed ($792) on the week.

The quick thought is that these levels could hold to give at least a minor (or perhaps major) support level for price – thus a long entry with a close stop might not be a bad idea IF you believe in Fibonacci relationships and the interpretation I have here (I strongly encourage you to do your own analysis for deeper insight).

If anything, it might give you pause to take an aggressive short right here, at least until prices firmly break these potential support levels.

Let’s take a quick look at the Gann Fan analysis chart (TradeStation):

I’m not a Gann expert, so I encourage others to submit comments on of this is correct, but using the $1 as an input on the default TradeStation Gann Fan indicator (taken from the price high), these mathematical lines appear.  Notice how the price has roughly held the relationship temporarily at a test, and appears to be an interesting tool for application.

At current, price is just beneath the 1×2 fan line, which could hold as support (though note that price has just breached beneath this level).  I won’t go too deeply into Gann analysis, only to note the possibility of price confluence with Fibonacci.

Back to Fibonacci, let’s look at the Fibonacci Extension/Projection tool, along with a “Measured Move” that has completed:

First, the Green line represents where I drew the three points necessary to create the Fibonacci extension grid (which resulted in the blue data to the right), which also happened to be a measured move.

Price fell $193 from the high to the May lows before rising $138 to form the July high.  The “measured move” would expect price to again fall $193, which occurred and was slightly exceeded on Friday’s close for a price decline of $207 per ounce (from the July high).  Often, price reverses once a measured move is complete.

Also, price has exceeded the 100% Fibonacci price extension line drawn from these swing high levels.  The 100% projection is at $804, and price is currently trading at $791 per ounce.

Conclusion:

Price is just beneath key potential support levels provided by Fibonacci retracements, Fibonacci extensions, and Gann Fan lines.  Whether price holds here is yet to be seen, but with such potential confluence of price levels about the $800 per ounce level, a bounce (or support) for price is not out of the question.  However, if gold prices trade beneath $790 or $780 convincingly, gold would have failed to support at these levels, and true support levels may be further away, and could come in as low as the $650 to $700 range.

Continue to watch this level very closely in the upcoming week.

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HANS Pops 50% – Short Squeeze?

Aug 15, 2008: 1:19 PM CST

In one of the most massive short-squeezes/bottom fishing price surges I’ve seen, Hansen Naturals (HANS) – famous for their energy drinks – surged 50% from new 2008 lows, which was preceded by a distinct positive momentum divergence.  Let’s look closer.

HANS Daily:

According to the Motley Fool article, Hansen released news that their Monster Energy drink (16oz) just overtook RedBull (8oz) to become the current market leader in US energy drink sales.  Such news, combined with oversold technicals and – I would guess – a relatively large short float gave the stock all the energy it needed to boost higher and form a new upswing in price.

Let’s keep in mind that the trend is still clearly and confirmed down, and even a 50% rally does not change that fact.  We’ll still need price to retrace part of this move and form a higher low before switching trend.  Also, note that the moving averages are currently in ‘the most bearish orientation possible,’ which does not bode well for the stock. On a bullish note, price is above the 20 and 50 day EMAs.

Notice in mid-June when a similar ‘price pop’ happened that took price above these averages yet bulls failed to consolidate the gains, and the selling pressure continued to press the stock to new 2008 lows, forming two additional swing lows prior to our current surge.

If by chance you may be looking to get long HANS, try to wait for a pullback, instead of getting euphoric and joining after such a large volatility price swing.  Also, let’s take a peek at the higher timeframe structure to see if it adds any clues.

HANS Weekly:

Sure enough, price is currently testing (and perhaps failing) at the 20 week EMA, which is a level that has not been breached (on a closing basis) since the horrific plunge in late 2007.  Notice how the 20 week EMA has contained all price rallies until present.  In fact, any retracement to this average served as an excellent, low-risk shorting opportunity.

This stock teaches us valuable lessons about divergences, trends, moving averages, gaps (from the daily chart), earnings, etc.  Continue to study it for your own insight on trading opportunities and risk management.

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Recent Money Flow Shift Affects Hedge Funds

Aug 15, 2008: 10:42 AM CST

There’s been a clear shift in money flow (as well as asset classes) that started in June which has cost some prominent hedge funds dearly who were behind the curve.  Those who remained long commodities or energy and short financials (because it was the easy thing to do) were crushed in recent weeks.  Let’s look at a quick article and see the recent money flow shift, and what it might mean for the time being.

First, let’s look at the shift away from the Long Commodities and Short Financials combination, and let’s now look at the Technology and Health Care sectors for current money flow.

This comparison begins in January and takes us to present.  What I’m demonstrating is the massive shift and reversal first away from energy (notice the almost 20% sell-off from June) and strong Financials (green) rebound.  Energy peaked first and Financials bottomed and rallied sharply.  That’s the first take-away from the chart.

Funds or traders/investors who continued to hold the ‘hedge’ trade were crushed because market dynamics changed.  Specifically, T. Boone Picken’s (a famous oil expert investor), commodity fund of his BP Capital lost 35% in July alone (overall, his funds lost 10%), a massive decline for a singular month.  According to a HedgeFund.net article:

“Pickens said a “steep decline” in natural gas and oil had an “adverse impact on our performance” in an investor letter.

The Washington Post called the downturn “embarrassing….”

“Pickens was not the lone casualty of the commodity backlash. The average hedge fund lost 4.35% on the HFN Hedge Fund Aggregate Average in July.”

The blog “Fund My Mutual Fund” has an excellent, brief commentary (including other news links) about this money flow shift, including the following quotes:

“I don’t think one of the best investors/corporate raiders of the past 30+ years suddenly got stupid; the rules have simply changed.”

“I think this showcases yet again how heavily the “long commodities/short financials” trade was weighted by the hordes of institutional money. When all these [investors] decided to jump ship at the same time, we all capsized.”

“The velocity of the moves nowadays are really the only difference – what used to takes months to unwind is now taking days or weeks at most. If you dare sit back and think about the situation over a couple of weeks, you are down 30%. Shoot first, ask questions later.”

This is a critical point, one of which is exacerbated by algorithm/computer trading and instant news access.  Linda Raschke often uses the phrase “Dog-pile in, dog-pile out” to refer to this phenomena of rapid movement and capital shifts in such a short period of time, driven by the expansion of hedge funds.

It’s phenomenal to watch and participate, but the rules have changed from years ago.  Opportunities still abound, but we have to be much quicker and alert, and pay attention to many markets and capital shifts to understand potential opportunities.

We’ll continue to watch these developments and the implications for the broader markets.

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Quick Intraday Market Look

Aug 14, 2008: 7:02 PM CST

Let’s take a look at the possible trading opportunities that presented themselves in the SPY (S&P 500 ETF) intraday chart today with the interesting price action.

SPY 5-minute chart:

You would have thought the bears would have mauled the stock market indexes when you woke up to read the headline “Inflation jumps the most in 14 years and is twice what was expected!” and yes, there was a gap down, but that gap was quickly faded and the market scarcely looked back from the start.  Why?  The reasons are beyond me, but I try to find potential low-risk opportunities as they present themselves throughout the day.

The first opportunity came with the overnight gap to initiate a possible gap fade trade, which actually worked with minimum interruption until price closed the gap and traded at yesterday’s close.  Instead of inflecting back down in the direction of the gap, price surged to new highs on the day and gave us a large opening range (30 minutes and 60 minutes) on high volume.

Price may have resembled a trend day to you at this point, but remember that trend days often begin with a gap that does not fill and then continues to one extreme throughout the day.  In this case, as price made a new momentum high, you should have been looking to buy the first pullback to the rising 20 period EMA, which occurred before noon and the next swing high actually formed on reduced momentum (notice the negative momentum divergence).

The actual high of the day (as happens many times) was formed on a negative momentum divergence (classic example), after which price tested the rising 50 period EMA (forming a clean entry long via the doji), but ultimately followthrough was minimal and price retested the 50 period EMA before failing, setting up a “Magnet Trade” to test the rising 200 period SMA (this was a classic example of a clean and smooth roll-over of a trend).

Price found support at this level before rallying weakly into the close.

The goal is to find low-risk trades and to play for small targets, rather than to capture every last penny.

Print and annotate your own charts for the stocks and markets you trade for improved pattern and opportunity recognition.

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The British Pound Plunge

Aug 14, 2008: 9:49 AM CST

With the rapid strengthening of the US Dollar Index, that means that many other currences that comprise the index have been plunging in value.  Let’s take a special look at the British Dollar and how spectacular that movement was.

British Pound (Currency iShares) FXB:

I chose to use the iShares chart rather than the British Pound Index ($XBP) so we could discuss volume implications.  Notice how volume was extremely low during the formation of this ‘line’ or rectangle formation, and then increased as a mini-symmetrical triangle completed before price plunged sharply to the downside.  This is a case where it might have been safe to assume that a triangle (or possibly larger rectangle) formation would have broken to the upside, but instead the pattern resolved sharply and suddenly to the downside with little warning as to how severe the move would be.

This development (unexpected break of a pattern and then a sudden surge against long positions) provides a clear example Dr. Steenbarger’s recent post “Mindful and Mindless Trading” where he discusses seeing a chart pattern and then jumping into the market based on that pattern without looking at the broader themes or reasons as to why a market might move (other than a solitary chart pattern), and also what happens when you do so and a market moves violently against you.

The new (and highly informative) Fresh Salt Water blog (written by a friend and regular reader) discusses the possible reasons behind this sudden move in the post “The GBP Slide” and I wanted to pull in a background quote:

“The UK made a decision some time back to not enter the Euro and for parts of this decade that decision looked to be paying off as it was held up as a shining example of a economic powerhouse in Europe. However, things are starting to go a bit wrong lately. The economy is slowing, UK consumers are mired in debt, the housing bubble which is now starting to burst rivals and on some measurements is actually worse than the US situation and inflation is rife. On the last point, recent inflation figures put the Retail Price Index at 5% – higher than the Bank interest rates. This is the first time since the early eighties that has happened. In addition, it’s unlikely the BOE [Bank of England] is in a position to rise rates to combat inflation (which would also strengthen the pound) due to the impact this would have on borrowers and the wider economy.”

Let’s also look at a larger timeframe structure to see what we could have learned from the weekly chart:

British Pound Weekly:

Here we see an upwardly sloping classic Head and Shoulders Pattern (that is more evident in the 3/10 Momentum Oscillator), the break of which would have signaled either a short entry or at least a long liquidation.  Price came back to test the neckline in March 2008 and then moved into a consolidation pattern (triangle) before breaking sharply lower on record volume.

Recall the bullish surge on the charts of the US Dollar Index (shown in my previous post “The Remarkable Strengthening of the US Dollar”) – there has to be a casualty of the dollar surge and those casualties are the currencies that make up the Dollar Index.

You can see similar bearish charts on the Euro ($XEU), Yen ($XJY, although not as severe a plunge as Europe), Canadian Dollar ($CDW), Sweedish Krona (FXS), and Swiss Franc ($XSF).

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