PM Daily Market Commentary - 12/04/2013

davefairtex
By davefairtex on Wed, Dec 4, 2013 - 10:10pm

Gold closed up +19.00 to 1242.50 on moderately heavy volume, while silver closed up +0.56 to 19.67 also on moderately heavy volume.  The gold silver ratio dropped -0.63 to 63.15.  Gold sold off in Asia making a new low of 1210 but then buyers appeared, bidding gold higher and stopping out the shorts repeatedly.  The rallies were not timed to any particular news release.  Silver looked much the same, hitting a new low of 18.89 before rallying.

Is this just short covering, or something more?  Hard to know.  I'd say a move above 1260 gold and 20.50 silver is needed to get the medium term shorts to start bailing out.

The dollar rose +0.054 [+0.05%] to 80.67.  The buck's trading range has narrowed substantially - it has been chopping around 80.50 - 81.00 for the past week or so.  It still remains in its descending triangle pattern; a break up in the dollar, bad for gold.  A break down, good for gold.  Right now, the dollar is mostly a non-factor.

GDX was up +3.16% on heavy volume, the bulk of the move coming at the same time as the 12:30 EST rally in gold.  GDXJ was up +3.32% also on heavy volume.  Will this lead to more than just a one-day bounce, of which we have had a very large number during the last 8 weeks?

One potential positive - it is possible the high volume GDX selloff two days ago and the move to gold 1210 was "capitulation".  Capitulation is a term used by traders to signify a large number of people simply giving up and selling at the end of a long bear market.  It often marks the low point of a move, and this would make sense given the point in the season now - tax loss selling season.  As traders looking to buy, we always like to see capitulation.  Of course for those who have been long this whole time, its really, really, really depressing, and it just makes you want to give up.  (Hint: that's why its called "capitulation")

Here's an indicator a friend of mine uses as one of his buy/sell triggers that helps to time these sorts of things: the 8 EMA.  You can see from the chart below how the 8 EMA (the green line) has acted as a decent "ceiling" during this downtrend.  A close above the 8 EMA may indicate a rebound - but as always its a "percentage chance" sort of thing rather than a guaranteed outcome.  During the last 4 months the 8 EMA has given a good signal about half the time.  That's why we use stops - a bad signal means a small loss, while a good signal (theoretically) results in a larger gain.  Trading isn't about certainty, its about keeping losses small, because you know going in you'll be wrong a good chunk of the time.  At least the 8 EMA would have kept us from buying several of the 1-day GDX rallies...

The delayed COT report was released Monday - it showed that the Producer group had decreased their short positions by a big -11k contracts while going long an additional +7k, making them net long for the first time in the history of the COT report.  The big banks and the miners have closed out their shorts and gone net long.  This I see as quite a bullish situation.  Its not a timing tool, however, but it does set the stage for an upside move.

I also see some hints of a possible bottom in some indicators, like the RSI and the MACD, which are starting to indicate the momentum of the downtrend is starting to slow down.  It is all pretty subtle stuff, but it tells me that it would not take much of an upside move to switch the psychology around.

I think the stage is set...the downtrend has been long, and the number of Managed Money shorts are large.  But for any sort of sustained rebound to happen, COMEX buyers have to show up for more than just one day, and they have to chase prices higher.  They will at some point, its guaranteed.  But is now the time?  We have to wait and see.

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