Tuesday’s big sell-off in gold with a break below the 50-day simple moving average and key support near $1250/oz looks to have generated a significant liquidation in what was a couple weeks ago a near record net long position by futures large speculators; large speculators reduced net notional length in gold futures by ~$7.5 billion USD in the week ended Tuesday, May 24th:
Commercials (gold miners and swaps dealers) also reduced their massive net short position by more than 65,000 contracts (~$8.1 billion USD) during the week ending May 24th.
Many trend followers (CTAs mostly employ trend following strategies and most CTAs fall in the large speculator category in futures) use the 50-day simple moving average as a simple indication of trend and will set a sell stop slightly below this moving average. Other trend followers use a trailing stop a certain percentage below the most recent high. In either case it’s obvious that Tuesday’s large decline triggered a number of sell stops and also appears to have readjusted sentiment on gold to a more balanced dynamic:
Today’s low ($1206.00) lines up within .50 with the 38.2% Fibonacci retracement of the December-May rally:
The heavy liquidation we have witnessed in the last couple of weeks likely means that gold will require some time to repair itself and put a sustainable bottom in place. Below $1206 the next significant areas of support are ~$1190 followed by $1175-$1180.
In addition, June/July are seasonally weak months for gold historically. Precious metals investors/traders should prepare for a messy summer trading range before a bottom is put in place by mid-August; while I see a low probability of downside below $1175, I view $1306 as a level that won’t be surpassed for several months.
This week subscribers in the Trading Lab over at CEO.CA were able to catch a large chunk of the Wednesday/Thursday bounce in GDX and completely avoid today’s downside. I expect the summer trading range to continue to offer ample opportunities for nimble traders. To subscribe to the CEO Technician Premium Service click on the button below:
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