PM Daily Market Commentary – 7/14/2014

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  • Tue, Jul 15, 2014 - 07:35am

    #1
    davefairtex

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    PM Daily Market Commentary – 7/14/2014

Gold was down hard today, losing -32.20 to 1307.80 on very heavy volume; silver was hit for -0.54 to 20.96 on moderately heavy volume.  Gold started selling off a couple of hours into trading in Asia, carried through to London, culminating in a 8,000-contract spike lower at 0900 EDT in NY, whereupon it traded sideways for the rest of the day.  Silver followed, but was not hit nearly as hard.

After the initial losses in the asia session, it was clear to me that the shorts were following up with their initial successes by selling the rallies and challenging the buyers, who were clearly not enthusiastic enough to push prices back up higher.  We'll have to see who did what when the COT report comes out on Friday.

The USD closed unchanged, at 80.22.

The miners did pretty well, all things considering.  With the entirety of gold's loss coming before the NY market open, GDX opened low, tried rallying in the AM session through the first hour, then sold off closing down -2.64% on heavy volume.  GDXJ was hit for a -4.79% loss on very heavy volume.  As selloffs go, it wasn't as bad as one might have expected: the GDX:$GOLD ratio didn't move much at all which is a positive sign, all things considered.  And in the chart below, you can see that GDX remains above its old consolidation range – just barely.  The GDXJ chart looks similar, but it appears to be slightly more positive than GDX.

From my perspective it was just about as good a day as one might have expected given the beating gold took prior to market open.  GDX closed near its lows, but managed to avoid dropping back into its old consolidation range by a slim margin.  So far the miners are showing reasonable strength in the face of a bad day in gold. 

Looking at the muted price action in gold during the NY session, it definitely looked like the Asia-London hammering took a bit of the starch out of the longs.  I would expect the shorts to continue trying to push the market lower until the buyers definitively show up.

SPX closed up +10 to 1977, while the Nasdaq managed to score another all time closing high.  VIX dropped to 11.82.

Bonds dropped a bit, off -0.43% but are still hanging on above their 20 EMA and still look bullish overall.

Brent crude – what can I say.  After getting steadily pounded for the past three weeks, it managed to close up +0.19 today, but I haven't seen any sign of a reversal pattern just yet.

 

  • Tue, Jul 15, 2014 - 09:57am

    #2
    Hrunner

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    Need Analysis

Dave,

Someone told me that gold markets were free and fair, that they were reliable pricing signals of actual supply and demand, I need to stop worrying about U.S. policy of manipulation since really that's just how a commodity market works and that I'm not sophisticated or experienced to understand that there are fluctuations, and that it is just conspiracy theory talk to suggest that the United States government has an official, but secret, policy to suppress the price of precious metals through collusion with commercial banking institutions.

Fair enough.  I need some analysis of the last 24 hours.

81 tons of gold were sold in 11 minutes

I'm sure its not fake paper gold, because, as I've been told by our trustworthy regulators and some highly experienced gold analysts that these markets are free and fair, that sellers would never create 81 tons of paper gold for the simple reason of price capping and profiteering, so these 81 tons of gold represent actual producers proffering actual physical gold, readily available.  Now by my calculations that's over a third of the U.S. annual production.  One third of production in 11 minutes.

So I need some analysis, because I watch economic indicators and news fairly closely, and in my inexpert eyes, I could not find an explosive, fantastically big gold-negative consequential event that would ignite what could only be described as a massive panic in gold selling.

Did a mining company announce a wonderful, gigantic high-grade ore find with plans to dig it out of the ground and throw it into the market as soon as possible?

Did the president and congress make a joint announcement that they are completely changing their reckless financial course, and making immediate changes by dramatically reducing government spending, creating much-needed, pro-business tax relief laws, and total reformation and reduction of government bureacracy?

Did a group of U.S. physicists announce they discovered really cheap and easily produced cold fusion technology which would lower energy costs by 90%, albeit in 10 years.?

Did the Fed announce that they would raise interest rates from 0% to 15%, and start unwinding its $4 trillion balance sheet immediately in the open market in order to make the USD hugely more scarce and more valuable?

In your expert analysis, could you point to the singular event that occurred at 2:00 AM EST that would lead to such massive, panic selling of 81 tons of gold in 11 minutes?  I appreciate it in advance as I would like to learn how to trade free and fair markets based on reliable trading signals.

Thank you in advance.

  • Tue, Jul 15, 2014 - 10:05am

    #3
    Hrunner

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    Letter to CME

Reprinted and timely

Bill,
The CME’s latest gold margin change announcement got kicked off in grand fashion. All of the cartel’s dirty tricks were pulled out of their bag. There was pressure on the access trade open. Next up was the 2:20 AM flash crash, featuring a 13 ½ ton gold dump in that single minute. That set up the pre-Comex open bash at 8:20 AM, featuring another 27 ½ ton dump in just 7 minutes. And finally there was the 9:00 AM pre-NYSE open dump, with a whopping 12,862 August contracts dumped in just 3 minutes. Most of that 40 ton blitz occurred in one single minute at 9:01 AM, and left no doubt that the cartel is apparently defending $1320 to the death. Nothing like selling a cumulative 81 tons of paper gold in just 11 trading minutes to make a powerful statement, that being regulation and enforcement is non-existent.

The newer lower margin requirements for gold and silver now have gold at a fairly lofty 22-1 leverage, with silver still lagging at 12.7-1. Enticing more (alleged) speculators into silver while it is at near record open interest is a curious decision. Funny too they decided to lower margins right as silver finally became more "volatile". I suppose now we can look forward to silver open interest topping 200K. That would be a billion ounces of silver contracts, no biggie I guess only if you don’t care about manipulation. You have to wonder just WHO those alleged speculators are that all along that have been willing to pile on such huge amounts of contracts in spite of leverage mostly in the single digits. Optimistically you’d say the shorts are screwed but who knows what’s going on with the COT.

Dow back to 17K, gold back under $1320. Central planners of the world rejoice. Any "doldrums", as in the summer variety, are strictly an imposed event. Behind the scenes however the action is anything but a state of torpor. No matter though, just keep MOPE alive in the hearts of the clueless, until bail-ins and hyperinflation become an all-too painful reality.
James

http://www.tfmetalsreport.com/comment/418134#comment-418134

  • Tue, Jul 15, 2014 - 01:12pm

    #4
    davefairtex

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    markets

It would be a constant source of amazement to me, if it weren't so predictable, that one standard is applied by mainstream goldbug commentators to gold prices that spike higher, while a completely different level of (accusatory, even shrill) commentary occurs when prices spike lower.  Just once I'd like to hear a massive whiny post when gold spikes up $40 in one day about "who buys gold like that", and a calculation of "how many paper tons of gold was bought in one minute."  Sheesh.

Back when I designed systems, there were two things: "what the customer asked for", and "what the customer actually needed."  These two things are often not the same, since the customer could be particularly clueless about both his own needs, as well as the capabilities (and costs) of hardware & software.

So in that spirit, rather than providing you with what you ask (analysis), I'm going to provide you with what I believe you need (training).  Namely, I'll first ask you to answer some questions of my own – these answers might well help you refine your understanding of How Stuff Works in the futures markets, and at that point I won't need to provide you with the answers you seek, since you'll be able to figure them out for yourself.

1) Do you know what a stop is, and how it works?

2) Do you know where stops are generally placed?

3) Do you know who places these stops, and why?

4) Do you know what "stop-gunning" is, who does it, how it works, and why?

5) Do you have a sense of just how long the techniques regarding (4) have been happening in markets?

Some optional questions:

1) do you know what resistance is, what it is caused by, and how it manifests?

2) do you know what support is, what it is caused by, and how it manifests?

3) do you understand what happens when support – or resistance – breaks?

So you have a choice.  You can either really try to understand how stuff works, or you can just continue throwing rocks when things don't go the way you expect them to.

Personally, I don't think intraday action in the futures markets – pretty much any futures market – is fair.  They are a snakepit for snatching money away from the unwary who imagine "trading to be easy" rather than a combination of art & skill that is learned over years if not decades.  Big computers work tirelessly to strip the clueless of their money.  Best to stay away.  Over longer timeframes, however, it all sorts out.

  • Tue, Jul 15, 2014 - 06:57pm

    #5
    KugsCheese

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    As Expected – Gold Paper Dump

  • Tue, Jul 15, 2014 - 07:55pm

    #6
    davefairtex

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    spikes down

Kugs-

Spikes down are as common as dirt – past few months, there was one almost every single day.  You guys just didn't care or notice (at least, I didn't get to see posts like this) because they were all bought by eager longs, so the price of gold wasn't affected.  And no prior lows or support levels were broken, so the volume wasn't so big.

Ah, but when the spikes down don't get bought – that is what encourages the shorts.  And they keep on shorting, and shorting, and shorting until the buyers finally appear.  When stuff works, keep doing it, until it stops working.

So far, no buyers today.  Gold looks to be closing at/near the low.  Maybe we'll see another spike lower intraday tomorrow, and then the discount will be large enough for the buyers to come back in.  We are just now approaching oversold levels.  If the uptrend is still in place, likely we bounce in the next few days.  Of course if we're in a trading range, we probably drop back to 1240.  We just have to wait for the market to show us what's up.

  • Wed, Jul 16, 2014 - 01:15am

    #7
    ommm

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    I’ll take mine plain please

[quote=davefairtex]

So in that spirit, rather than providing you with what you ask (analysis), I'm going to provide you with what I believe you need (training).  Namely, I'll first ask you to answer some questions of my own – these answers might well help you refine your understanding of How Stuff Works in the futures markets, and at that point I won't need to provide you with the answers you seek, since you'll be able to figure them out for yourself.

1) Do you know what a stop is, and how it works?

2) Do you know where stops are generally placed?

3) Do you know who places these stops, and why?

4) Do you know what "stop-gunning" is, who does it, how it works, and why?

5) Do you have a sense of just how long the techniques regarding (4) have been happening in markets?

Some optional questions:

1) do you know what resistance is, what it is caused by, and how it manifests?

2) do you know what support is, what it is caused by, and how it manifests?

3) do you understand what happens when support – or resistance – breaks?

[/quote]

Hello Dave,

While I appreciate your efforts to inform the members of this site, for myself, I would be more receptive to your musings if there were a tad less of a patronizing tone to this post.  I generally think of training as something we do with dogs and diapers.  I, for one, would welcome being taught rather than trained.  As such, for each of the questions you raised, would you be so kind as to provide the answers?  Long ago, I realized that the markets were skewed to favor the market makers over the market participants and I put my efforts into building small businesses and acquiring managed rentals to provide a cash flow rather than risk my hard earned money in the Wall Street casino.  However, I still think it is useful to understand how these things work and you have certainly demonstrated your knowledge in these areas.  Please share it but, if you would, could you hold the sprinkling or patronization?  Thank you sir.

  • Wed, Jul 16, 2014 - 09:27am

    #8
    davefairtex

    davefairtex

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    traders, stops, and big spikes down

omm-

I would be more receptive to your musings if there were a tad less of a patronizing tone to this post.

A tad?  Just a tad?  🙂

I confess I sometimes have an issue:  I get testy when someone pretends to ask me for analysis, but the tone of the "request" indicates that no genuine asking is happening.  So you got to see one of my testy responses.  Factual, but testy in tone.  I'll try to do better and take the high road next time.

However, I still think it is useful to understand how these things work and you have certainly demonstrated your knowledge in these areas.  Please share it but, if you would, could you hold the sprinkling or patronization?

Since you ask me from a place of genuine curiosity, I can't help but respond in kind:

Generally speaking, "the market" consists of a bunch of human beings, some of whom in aggregate tend to act on their emotions in predictable ways.  In an uptrend, the emotion of "missing out" drives some subset of traders to buy at certain predictable points on a price chart.  We may be individuals, but in aggregate, we act like a predictable herd.  That's what chart analysis is all about – trying to assess some subset of the herd's likely emotional reaction at different price points.

Support

Support is the term of art that describes a price range where some amount of herd buying can be expected to occur.  One example of support would be a previous low – traders who wanted to get long, but didn't buy the low last time felt like they missed out.  If you ever heard anyone say (possibly even yourself!) "I'm gonna buy gold for sure, if it ever sees 1200 again" – that's "support at 1200."

Likewise, the lower bound of a trading range is also support.  If gold has bounced 5 times off 1240, that level will be support – traders will expect it to bounce again at around 1240, so some number of them will put in an order to buy at that point.  Lots of chart patterns provide support.  Another support area is the point at which a breakout happened.  Traders who missed the breakout at 1280 will put in an order to buy at that breakout point.  They don't want to miss out again.

We are creatures of emotion, and this stuff is based almost entirely on that – it works out well enough because the market is us.  Nothing works 100% of the time, but you will almost always see prices bounce, at least a little bit, at natural support levels.  Traders who missed out will put in automatic buy orders at support points.  More orders for more reasons results in stronger support.

Stops

Stops are used by disciplined traders to protect them from small losses turning into big losses.  A stop is an automatic sell order that triggers once a price is reached.  (There are lots of types of stops – I'm just talking about the sell stop to keep things simple).  The trading technique is to place a stop a certain distance underneath support.  This way, if enough herd buyers fail to materialize at support, the disciplined trader will sell out quickly, in order to prevent a small loss turning into a big loss.

Disciplined traders might use the combination: "I see a pattern that suggests gold will likely rally, and the price is 1283, support is at 1280, and so I'll buy gold at 1283 and put in a sell stop at 1275.  That way if support breaks and I'm wrong, I will lose only $8, but if gold does rally off my pattern at 1283, I'll let the trade run until I see it rise to its previous high of 1348, when I'll sell – risk of loss $8, while possible gain: $65."   Note the trader doesn't have to be right every time – even if he is only right 50% of the time he is still quite profitable.  Disciplined trading is all about odds and risk limitation.  It is never about sure things.  As they say, death & taxes are the only sure things.

Now of course other traders know generally speaking where stops are usually placed.  If a move down is strong enough, it will overwhelm the automatic orders at a support area, and price will "break support."   When this happens – when the collection of automatic buy orders are exhausted – those clusters of stops hovering below support get triggered, and that activates all those sell-stop orders, and you get to see one of those high volume spikes down.  The vast majority of the selling at that moment of the support break isn't one trader making a huge sale, its a whole bunch of traders exiting their positions all at once using these automatic stop loss/sell orders.

So a buy at support is a gamble.  The trader is betting support is stronger than the selling pressure.  Sometimes the trader is right, and sometimes he isn't.  A stop is trader insurance; it gets the trader out when he's been shown by the market to be wrong about one of his guesses.  Traders are wrong frequently, but the discplined ones take only small losses when they are wrong.  When they are right, they (theoretically anyway) make gains far in excess of their small losses.

Stop-gunning (a.k.a. stop-running)

Stop-gunning is a technique used by larger traders who calculate that support isn't so strong, and so when price gets near support, the method used is to sell a large number of contracts all at once.  If his sell order is larger than the number of automatic buy orders at support, he wins, support breaks, the stop loss orders placed under support by the disciplined traders are triggered, and we get treated to a big gap lower as all the stops get triggered more or less at once.  And the trader who successfully "ran the stops" gets rewarded with a good-sized payday.

Of course if support is stronger than the stop-gunning trader has estimated, then the traders who had the automatic buy orders have successfully bought the low, and the stop-gunning trader is now heavily short – right at the low, which is not a very happy outcome for him.  He'll have to buy-to-cover to bail out of his position, most likely losing money, which will provide fuel for a nice rebound making those that bought at support quite happy.

I'll let you guess how long the stop-running technique has been around.

So Who Would Possibly Sell Gold Like That?

So in answer to the question – who would possibly sell gold like that?  A bunch of disciplined traders all getting their stops hit on a support break. They all sell at once.  That's who.

So bottom line – when support gets broken and a zone of stops hovering right under support get hit, price tends to fall rapidly – almost instantly.  And the more disciplined traders who were recent buyers with stops in that area, the more contracts get sold when that zone is hit, and the bigger and more impressive the downspike.

Goldbugs – especially ones who don't really understand how disciplined traders work – don't want to hear this.  They imagine that every big spike lower in gold is because of an Evil Bullion Bank, or perhaps The Fed, or maybe an Evil Bullion Bank acting on behest of The Fed selling a bunch of "paper gold" contracts in order to suppress the price of gold.  That might actually be true in some instances, but quite often it is just one fairly big trader who is out to see if he can run a bunch of stops below a possibly weak support level in order to cash in on an intraday move.

Traders try running stops all the time.  In the past month, there was one of these about every other day.  In recent weeks, after the daily spike down occurred, buyers came in and bid the gold price right back up, overwhelming the sellers each and every time – much to my surprise.  This told me there were a large number of traders looking to get long gold, even as prices continued to rise.

But yesterday, the buyers were just not there.  My sense: after a long move up, most if not all the prospective buyers were already long.  Gold 1348 meant that every possible buyer of COMEX futures was already in the market, with few new buyers remaining on the sidelines with their automatic buy orders at support.  So when the shorts hit the market, buying was weak, and the stop-gunners won – and a bunch of longs were stopped out.  And then the stop-gunners tried again – and won again, and a bunch more longs were stopped out.  Rinse, repeat, and now we're at gold 1294.

If the longer term uptrend remains in place, at some point soon the COMEX longs will want to re-enter the market.  Likely, many of them still made money even though they were stopped out at 1320, or at 1300, etc.  They'll try to buy the dip at some support point, and when enough of them do this, they'll overwhelm the sellers, who will be forced to cover, gold will bounce, and the cycle will start all over again, and the uptrend will resume.

That's when I say, "the buyers showed up" and gold resumes its uptrend once again.  And that's what I'm waiting for.

 

  • Thu, Jul 17, 2014 - 01:40am

    #9
    ommm

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    Thank you Dave

Thank you Dave for taking the time to provide very thorough and complete answers.  I appreciate your efforts. 

Just one more thing.  I think it may be a bit unfair to paint so-called "gold bugs" with the broad brush of foolishness.  I have a feeling that I might fall into the category you call a "gold bug" but, in my ignorance, I'm quite content with quintupling my money over the past 14 years, sleeping well in the process, and having abundant leisure time.  Many of the friends, acquaintances, colleagues, etc. that I know who trade in the markets seem rather frenetic about the whole process and spend untold amounts of time on this matter.  From my limited perspective, most of their studies of the markets (whether stocks, bonds, currencies, commodities,  precious metals, or whatever) can be summarized by the following: 

In the future, the market may go up, or it may go down.  If it goes up, it will be for some reason, and if it goes down, that will also be for another reason. 

In the mean time, I don't worry about such things, my wealth is preserved, my cash flow continues, and I spend my free time traveling around the world or fishing, hunting, gardening, cooking and eating gourmet food, and making love.  For me, it sure beats what they do staying up late and poring over endless charts but to each their own.

But I appreciate folks like you who keep us informed.  Thank you.

 

  • Thu, Jul 17, 2014 - 03:27pm

    #10
    davefairtex

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    broad brushes of foolishness

Well if you got the idea I'm painting all goldbugs with any broad brushes, then let me correct whatever it was I said that led you to this conclusion.

You stated your market philosophy as follows:

In the future, the market may go up, or it may go down.  If it goes up, it will be for some reason, and if it goes down, that will also be for another reason.

Seems right to me.

A common "mainstream goldbug" viewpoint of the market – but definitely not shared among ALL goldbugs, of which I consider myself one also – is somewhat more narrowly focused, and it might be summarized, as:

If gold goes up in price, its because people are finally realizing just how wonderful gold is.  However when gold drops in price, it can only be for one reason: the intervention of our Central Planning Authorities and their minions.  Left free of interference, gold would never drop in price; it would only ever go up.

As you might guess, I don't agree with this sentiment.  Gold is a market, like any other; sometimes it goes up, and sometimes it goes down.  And I was attempting to describe the mechanisms of the market to provide a framework for understanding why such movements take place, for those who might have an interest.  But hey, some people like to understand all the particulars of Physics, while others are content with the knowledge that "rocks drop when you let them go."

In the mean time, I don't worry about such things, my wealth is preserved, my cash flow continues, and I spend my free time traveling around the world or fishing, hunting, gardening, cooking and eating gourmet food, and making love.  For me, it sure beats what they do staying up late and poring over endless charts but to each their own.

I really appreciate your observation that there is such a wonderfully wide variety of people in the world.  For me, hunting fishing and gardening – wow, not my thing.  But I definitely like eating fish and cooking vegetables from the garden, so I totally respect the hunters, fishermen, and gardners.  Isn't the world great?

We do have a common interest in some things, however.   🙂

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