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Action in the Precious Metals markets yesterday was VERY bearish and confirms our suspicion that an intermediate top may be forming that
could lead to a brutal correction. Yes, yes, we
know how bullish open-ended
QE is for gold and silver
and how the dollar is doomed
etc, but so does everyone else – and the latest COTs show that both Large and Small Specs have
thrown everything they have got at this uptrend,
as we observed at the weekend. The trade is now dangerously
overloaded on one side of
the scales and a larger
dollar rally, which looks
likely on technical
grounds, could trigger a sudden
rout in the PMs.
Gold made new highs intraday yesterday, as we can see its
3-month chart below, but couldn’t hold the gains
and fell back into the potential intermediate top
pattern, leaving behind a
candlestick on its chart that approximates
to a bearish “Shooting
Star”, the second such bearish
candlestick in just over
a week. Volume has remained
high as the price has tracked
sideways, another warning
that a top may be forming, and of course, these warnings follow failure of the uptrend shown. Tactics for traders here are clear cut and simple - TAKE PROFITS AND GO SHORT, but
reverse position immediately following
a close above yesterday’s
intraday high, should this occur. This of course will sound pure lunacy to many of you reading this,
which is exactly why it
could work out well, and anyway, with the stop out point so
close by above and well defined, where’s the risk??
 
The gold COT chart required
rescaling because the
Commercial short and Large Spec long positions
“flew off the scale”.
Although these positions can of course get even more extreme if gold makes another upleg, they indicate
a high probability that
an intermediate top is forming, especially given yesterday’s action
in the gold market.
What about the broad market? – although its shorter-term uptrend has not (yet) failed, unlike gold and silver, as we can see on its
3-month chart below,
action in the recent past
has been negative, with a
bearish “Gravestone
Doji” appearing on
the S&P500 index chart on the highest volume for many months, which we took as a warning at the time, and yesterday a
large, bearish “Shooting
Star” candlestick appeared
on the chart that portends imminent failure of
the uptrend that could lead to a steep drop.
Now we come to the
all-important outlook for the dollar. While we are amongst the first to admit that
the outlook for the dollar is
not exactly rosy, what with its
enemies at the Fed ganging up to destroy it,
short-term it is quite heavily
oversold, as we observed at the weekend, and could be due a larger rally
as projected on the chart
below to complete its potential Head-and-Shoulders top. Such a rally would be
the perfect excuse for a sharp
correction in the Precious Metals.
In the light of the above observations it is thus
most interesting to
examine the latest Euro FX COT. This chart shows that Large and
Small Specs have collapsed
their short positions in the euro back almost to the zero line, which means that
they have ceased to be bearish on the euro, which also means
that they have ceased to be bullish on the dollar. Back in the Summer
the Large and Small Specs, force fed with a diet
of misleading news by the mainstream
financial media, were encouraged to go heavily short
the euro, and they were subsequently fleeced when it staged
a big rally, while the Commercials were laughing all the way to the bank, as usual. This chart suggests that a larger dollar rally is in the works. Of course the dollar’s fundamentals are
awful, but at this point that could all be priced in.
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