Still long, but Gold needs to prove itself (raising stop)

1 week ago on September 23 we made a very bold call to go long Gold based on a new signal generated by our predictive algorithm.

At that time, Gold was bouncing along new 52 week lows trying to find a bottom, trading below its 200 day average, and the sentiment was overwhelmingly bearish… so who are we – some boutique algorithmic trading consulting firm north of the 45 – to go against the trend calling a Buy on one of the most heavily traded metals in the world?

As we wrote in our original call, the historical trading patterns our highly predictive algorithm identified were just too prophetic to ignore… and what better way to get the best price than when all signs are bearish, so we obeyed our computer (which has done us quite well) and went long.

But Gold right now is acting like a losing boxer in a prize fight: it has been beaten-down all year long and is trying to simply stand up before it can walk.

Since 9/23, Gold has been oscillating between our entry price of $1,320 and the 100 DMA. At today’s open, Gold gapped up to the 100 DMA at $1348/oz (or $2800 unrealized profit per contract on our long position). This price is where many of those bearish traders must have been waiting because Gold subsequently dropped $26 to $1322/oz which was very close to our entry price.

As volatile as the action was, we weren’t overly worried as this all happened before 9:30 AM EST (when most of the trading shenanigans occur) and the GLD ETF hadn’t started trading yet. Once the NYSE bell rang, Gold retraced up to a point where bears and bulls now seem to be fighting over the $1330 handle (also a key fib level)…

Click image to enlarge

Click image to enlarge

As you can see from the chart above, Gold has developed a triangle since 9/18, and our entry price happens to be in the bottom half of that triangle.

Gold also happens to have an inverse correlation to the USD/JPY currency pair, which has developed it’s own triangle since the start of the year. In fact, while Gold was spiking up this morning, USD/JPY gapped down, both touching the outer boundaries of their respective triangles…

Click image to enlarge

Click image to enlarge

Elliot Wavers will tell you that symmetrical triangles are a bearish sign if developed in a down trend, and bullish if in an up trend, so from that standpoint it would appear USDJPY is going higher and Gold lower. But then again these rules are just probabilities based on historical patterns which our algorithm accounts for.

Where we stand:

Our long algorithmic signal is clearly against the prevailing trend and general negative sentiment toward Gold, but we prefer to take the viewpoint of our cold-hearted computer algorithm and stay ‘long until it is not’, so for now we remain in the trade. With such wild trading below some key fib and moving averages however, we are tightening our current stop from $1,285 to our entry price of $1,320.

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The content contained in this blog represents the opinions of the authors who may or may not hold long or short positions in securities of various companies discussed in the blog based upon the authors' views. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied solely upon in making investment decisions, ever. It is intended for the entertainment of the reader, and the authors. In particular this blog is not directed for investment purposes at US Persons.
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