After a 45% rally during the first 8 months, of 2016, platinum has spent the past 2 years in a range-bound consolidation between the 1,030 and 890 levels. This has offered flexible traders many opportunities to profit on both the long and short side.
This pattern has continued throughout 2018 with a sharp $160 price advance, being followed by nearly 4months of retrace, and now we find ourselves right back where we started in mid Dec17. We now appear to be at another one of these inflection points.
This week the COT report has a interesting story to tell. Please click here.
This is a 4 month view of Commercial activity in Platinum Futures. Factoring in a weighting and volatility component, we measure participant positioning and activity and then score this on a 18 month and 5yr basis. This is reflected as a Relative Strength Score from 0-100%.
Notable points here:
1 - Commercial Net Position scores a 91% on a 18m basis.
2 - Commercial Longs @ 19,708, score 100% on a 18m basis.
3 - Commercial Shorts of (33,473) score a 84% on a 18 month basis.
4 - We see that this accumulation has occurred on a continuous basis over the past 4 months, as price has dropped from over 1,000 to below 900.
We now measure price dispersion for every instance where Commercial net position scored 90%+ on a 18 month basis.
What we see is that on a 20 day forward interval, 70% of the time price advances $27.50 vs declines of only (16) for odds of 7:4 in the bulls camp. The baseline 70% movement of Platinum going back to 2004 is $24 up vs (20) down, so we see distinct out-performance as odds have improved from 6:5 to now 7:4.
Further adding to the favorable odds is that we are approaching the seasonally strong period. Going back to 2000, the months of July + Aug have seen a 61% winning percentage with the average combined price advance of 8% over that period.
The next point we want to highlight is how Platinum has traded during the past 18 months. Please click here:
We can see that Platinum has been range bound over the prior 18 months. What is interesting to note is how it behaves at the bottom of it's price cycle. What we see is that declines end on sharp down trading weeks with significant increases in volume.
Standard Technical Analysis theory will flag this as a confirmation of trend continuing, and encourage more shorting here, which is exactly what trend following algos are doing. However, we can clearly see that this type of price action has been marking bottoms like a clock.
As a final note, with 70% of PGM production coming from South Africa, there is large geo-political risk to future production. Currently there are threats of government takeover of mining assets, upcoming wage negotiations with labor unions, as well as a silent genocide of South African farmers taking place. This is not the backdrop we'd want to be short of the platinum metals group.
Platinum has seen a 15% decline over the past 4 months. Trend following algos are at a extreme short position currently, with Commercial Traders taking the other side of that bet. Historically this is led to significant price advances with 7:4 odds in the bull camp. The recent washout is signaling that a intermediate low is due shortly, as we enter the favorable seasonal period of July and August.
As technicals are all extremely bearish, and we don't want to fade this strength, wait for some indication of price reversal before entry. A close above 893, the May 2 low, will give first indication of a bear trap, as all of those shorting the breakdown from 2 weeks back will be hit with quick losses.
Unfortunately there is not a liquid options market to hedge here, so we would use smaller position size and wide stops as a strategy. Go long at 893, using 860 as a stop. Look to ride the position higher throughout the summer for $90 or better, giving you 3-1 R/R.
Our Data Analytics platform was founded upon a very basic premise: If insurance companies can create actuarial tables to assess the statistical probability of maturities, and use that to price risk, then why can't we do the same with Commodity and Futures price movements?
The Alchymist Data Lab provides traders and risk managers access to a expansive cloud based Statistical Database for measuring the probabilities of price distribution. Our data analytics and research help identify uncorrelated, high probability trade opportunities in the Commodities and Futures Markets.