In late October we highlighted the danger and downside risks to the PM's space - Put spreads to hedge core longs and tactical shorts were recommended.
However now we are seeing multiple extremes that are favoring long bets. Let's take a look at the setup.
Firstly, lets take a look at last week's COT report.
Massive Commercial Buying was seen in both Gold & Silver through last Tuesday - With 57k + 27k Futures contracts bought in Gold and Silver respectively. This scored 100% on a 18m basis, and 93%/100% on a 5yr basis.
While this is constructive action, i.e. seeing Trend Following Hedge Fund algos loading up on shorts after a $100 sell-off, history tells us that given this condition of massive 1 week commercial buying, further price weakness is to be expected by a factor of 3-1 in bears favor - In all instances since 2008, whereby Commercial 1wk position change ranked higher than 95% on our proprietary scoring system, the 70th percentile drawdown was $21, and so far this week this is exactly what we have seen.
However, after this latest flush, we started to see short covering and buying 1 day before the expected Fed Hike - So for those who believe interest rate hikes are bearish for Gold, of which we are not one, they have already been selling and now it's time to ring the register.
Lets take a look at the Gold daily chart for some signs of capitulation.
1 - The first thing we will note is that this last flush from 1280 - 1240 was on ever decreasing volume.
2 - After the waterfall drop we have seen 3 consecutive days printing candles that are signaling indecision like spinning tops and dojis. This is a sign of indecision, and after a trending move, indecision precedes reversals.
3 - Our Oscillator is flashing a buy, with the prior signals in 2017 all triggering rallies of at least $50, and up to $140 after the July bottom.
Finally. we are approaching a very favorable season for Precious Metals. While Diwali buying was somewhat of a dud this year, Chinese New Year buying lies ahead and gold is on sale.
Since 2000, Gold has sported a 64% winning percentage in Jan-Feb, with Average Gains of $98 over the 2month period.
Silver has some catching up to do
Silver has been a extreme disappointment this year, actually down 4% for the year. The divergence from Gold has been significant, and it is flashing technical extremes.
1) Since 2014, over 994 Trading sessions, this latest flush in silver from 17.27 - 15.63 over a 13 trading day period scores in the 96th percentile of all drawdowns over a 15 day period. While not a reversal signal by itself, it shows this selloff is at a 4 year extreme.
2) We follow adaptive weighted Channels for trend direction. When Both our 9+23 week channels are sloping down, with price also below them, this signals what we refer to as a "Weekly 4 down" signal. Given this trend setup, we then measure the difference between the 23week low price level and the closing level and score this on a 18month relative basis. When our score is below 20% this is signaling a extreme move below the 23week channel on a relative basis and the 70th percentile move over the following 20 trading days is $1.21 up vs .35 down for Bull/Bear odds of 3.5-1.
Precious Metals have seen extrme 15 day sell-offs capping off a very bearish 2 month period. Commercials are heavy buyers into this weakness, while CTAs are sellers - This action is taking place as we are heading into Chinese New Year, and very favorable seasonals for PMs, and the expected Fed hike is behind us.
Traders can lock in profitable hedges from late October and open new speculative long positions. Silver and Platinum offer value on a relative basis as they have significantly underperformed in 2017.
Action to take.
1) Buy the March 18 Silver 16.50-17 Bull Call spread - This should cost you approx 9.3 cents per Spread, while your upside is 41 cents or 4.38 -1 R/R. To further improve the trade economics close the spread at a 50% stop loss, or 4.6 cents risk, which then gives you a 9-1 R/R if things play out as expected.
2) Go long 1 unit Platinum with no stop. Sometimes you have to buy value, and purchase and hold an asset when it is on sale.