The Dark Cloud Cover is a Bearish reversal candle. It occurs during a uptrend where a bullish Long Candle is then followed by a candle with a Higher Open but then a close that closes below the midpoint of the prior bullish candle.
This creates a negative perception as the higher open is followed by a much lower close. Lets see 2 examples on the following weekly charts:
After bullish hammer candles 3 weeks ago, which occurred right at the 61.8% Fib retrace levels of the preceding advance, both GC+SI were poised for rallies. Long advancing candles confirmed their bullish posture the following week, so this current setback can only be described as disappointing for Metal Bulls.
Fundamentals make charts, so what has suddenly spooked bulls and emboldened bears?
1) Softer Indian Physical Demand
"Dhanteras is considered to be more auspicious muhurat compared to Pushya Nakshatra for buying gold. Therefore, purchases are likely to be marginally higher. Market demand, however, continues to remain low and sales will be lesser than last year," said Haresh Acharya, national secretary, Bullion Federation of India.
2) Strong Dollar has created a Headwind for Gold/Silver as well as other commodities. Let's take a look at DX Futures:
There is a Reverse H&S bottom in play, and a Measured Move breakout above the neckline targets the 97 area, which is also happens to be the 50% retrace level of the entire 2017 decline. So this scenario is more than plausible; a oversold rally in DX retracing the decline in both price as well as time. Commercial Traders certainly seem to share this view:
Now, it must be noted that Commercials first 90+ 18m Score on Net Positioning was seen back on June 20, with DX trading @ 97.42. So the Hedge Funds have certainly been getting the better of this match-up for the past 4 months.
However, with this extreme in positioning we do wonder who will be left to short greenbacks here? Also, with all of these profits on DX shorts waiting to be reaped, it wont take much more action to unleash a wave of Stop Buying by the Hedge Funds trend following algos.
3) There is a Huge potential Catalyst out there with Trump's pending announcement on who will be next head of the Fed. Many names are being floated along with their assumed Hawkish/Dovish positions. If someone like Taylor or Warsh get the nod, this could be viewed as negative for PMs, and could be used to hammer price lower.
There are warning signals in the air, and PM bulls would be wise to place some hedges to weather further potential downside. This is not a bearish call by any means, and we are holding our Gold/Silver Stock, and physical positions with no stops. Rather, it's a warning to hedge leveraged futures positions.
Looking at the COT, for PMs we have found that it pays to watch what the Swap Dealers are doing. Currently their positioning stands at a very supportive 52% + 61% score respectively.
Our view is therefore that downside is possible but will likely be muted. For Gold, 1275-1200 put spreads, and Silver 17-15.50 put spreads, would be a low cost insurance bet. You can further reduce this cost by selling covered calls out of the money.
If you are bearishly inclined, then shorting breakdowns below recent lows of GC 1,277 and SI 16.92 could prove profitable.