After yesterday's Gold Wipeout I thought we should look at how things look right now in this market. Is that the beginning of things to come, or just a one hole double bogey? The chart above is the weekly chart of the Cash Gold Market, with of course the COT and some of my other things as well. First, notice that the Sentiment and Valuation indicators are pegged at the top. Valuation at times can max out like this, but sentiment is more rare to be at this level of extremity. However, this has been one of the biggest moves of my lifetime, so this is no suprise that either of these is here. It is also no indication that the market will immediately decline. What it is though is a warning sign to be careful.
Next, notice how the Large Trader net long position has blown past the prior record levels. In general most markets have theoretical limits here because of the position size limits imposed on big traders, that is not there for commercials. However, we have seen this before where when a major run in the market happens the prior levels get exceeded. Large Traders are generally momentum traders, so they use open profits to pyramid and buy more as trends continue onward like this one has. The flip side to that is that when it is time to exit, the doors get very crowded. In general we want to be one the same side of the market as these guys due to them being the trend accelerators.
Once we get a short term indication that they may be beginning to exit, that is when we need to look for price reversals. As you will see in the next chart, that may be happening here. The last graph is just displaying the normal seasonal pattern, which calls for a January High, so we are also in the ballpark for that to have an influence.
One of the things I mentioned back in October was the rumor that the worlds Largest Commercial in this market was going to unwind their short hedge in this market. This position was supposedly a couple of Billion dollars. At the time I mentioned that the bullish case then would be that we could see what is called commercial capitulation. This occurs rarely, but did with Crude Oil at it's high. This is an instance where they are losing so much money on a hedge that they throw in the towel on that position. At the time I had stated that would result in a huge blowoff upwards, which is what has occurred. So it does appear that is what has happened. The general pattern to expect in that instance is what happened with Crude Oil. If that is mirrored in this market, we could revisit very low price levels here.
There is one problem with this assessment. Although price seems to reflect that has happened, the COT report does not. The COT report shows that the Small Speculators were behind the recent vertical move. This seems very hard to believe to me, the numbers just do not work for that to happen. There is simply not enough buying power between me and you to overcome what these large players who have been selling are doing. Also, what should be reflected in the COT report if that had occurred is a large decrease in the net Commercial Short Position. This has not happened, they continue to show record short levels. I think the answer therefore has to lie in how the government is classifying some of these positions. There just simply has to be a large entity that is being classified as a Small Speculator that is in reality a Commercial. Mistakes like this have happened, but in all honesty they are rare, and this is simply my conjecture as a possible explanation for this.
Why does this matter? In reality it does not. When a market moves into a blowoff phase like this there are very few if any reliable things to look at that can identify a top. I did short the Silver market as you know on Thursday, so that at the moment appears to have been pretty good timing. This was done through a proprietary technique that will not be revealed in here. It has nothing to do with the COT data. I do however like to have an idea when analyzing something like this, what the big players are doing, so in summary everything matters. When you put on a trade though the only thing that matters is following your rules for entry and exit. The research and analysis needs to be done on the front side. I did lay out the general overview as to why I did this trade the day before it was triggerred.
Do we have a potential major top at hand?
You can see with the two instances for the trade setup marked 1 and 2, that this new tool has done a very good job of keeping me out of trouble here. The only two instances it has indicated a trend fighting trade on the short side, it has been accurate. Most indicators like this diverge against trends constantly and have you always fighting them and getting run over. Notice the size of the daily range Friday and also the large range a few days before it. This type of volatility often indicates a change of trend is in the works. You can see that all the way up the range sizes were fairly uniform. This does indicate now some hesitation about all of this.
It is my personal opinion that a top can occur at any time here, but I do not know for sure if this is it. I do think it is, but we still have not broken down enough to say that the up trend has broken yet. So, at the moment this has to be viewed as a retracement in an uptrend. The next chart shows why I think it is more than that.
The US Dollar is on the verge of setting off one of the biggest short squeezes in history here. We have had 3 prior false trend breaks, so it is possible this is another one. What makes me think it is not is that the low occurred right on the exact day that a Larry Williams report predicted it would 6 months ago. My experience with his forecasts are that when a market follows his road maps for several months, they tend to be uncannily accurate in future predictions. When the Markets stray from the Maps I just disregard the turning point predictions. Many markets have strayed from those Maps this year, but this one has turned almost exactly at every spot his map had predicted. I used this knowledge to pass on several long currency setups that have been showing up the last 2 weeks, and it has saved me alot of money.
If this is a major low being made in the Dollar, this will be the top for GOLD. It will be fun to watch either way!!!