Hourly Action In Gold From Trader Dan
Posted: Mar 15 2010 By: Dan Norcini Post Edited: March 15, 2010 at 2:46 pm
Filed under: Trader Dan Norcini
Dear CIGAs,
It appears that we are back to the old familiar pattern of strength in the Dollar bringing in algorithm selling of commodities and by connection, gold. Friday was a bit of a break from that norm as it now appears that we had a bout of pre-weekend short covering in the European related currencies during which gold was sold lower on ostensibly easing fears concerning Greece. I say “ostensibly’, because it was evident that the take down in gold was a bear raid.
Today, copper is getting knocked down as is crude oil, which has seen its gains from last week completely erased. As said many times here ad infinitum, ad nauseam, these markets are not really trading fundamentals all that much on any given day but rather fund order flow. If the funds buy, locals buy. If the funds sell, locals sell. That is all that these markets have become.
We now have cases in which there is so much managed money coming into certain commodity markets at times, that it is chasing out commercial hedging interest. The result is large air pockets above the market which causes markets to shoot sharply higher on up days. There are simply no sellers on those days. The flip side occurs when these same funds are not buying or actively selling – the market then falls into a void as there are no bids to be found. The commentary usually calls this “volatility” but what it really is in my opinion is a sign that these funds are far too large for the markets and that we need to see the CFTC rein them in.
The commodity markets came into existence to provide a risk management tool for bona fide Producers or Users. When they are unable to use the markets for that purpose, then it has become evident that something is seriously out of whack. I read far too many reports of commercial hedgers incurring damaging margin calls because these huge hedge funds are driving prices to extremes unwarranted by the fundamentals. Eventually the market will correct such an occurrence but in the interim, underwater hedges can wreak havoc with risk management programs. The problem is not so much with the mega commercial firms which are well capitalized as a general rule or can at least secure financing enabling them to meet margin calls and ride out their hedge until it is time to lift it. It is the smaller or mid-sized commercial entities which do not have such access or the financial wherewithal to deal with a short hedge that goes deeply underwater due to a barrage of algorithm buying, that get the short end of the stick. More of these guys are trying to move their business to private contracts off the exchange but apparently the exchanges do not care as they love the increased volume of trading and fees associated with the business of the big boys. Besides, the exchanges have also figured out a way to make lots of money renting computer server space to high frequency traders. Some call this “progress”. It looks to me more like a case of short-term sightedness versus long term health of the markets. Enough of my soap box pontificating for one day however.
Even though the Dollar is fairly strong this AM, gold is managing to hold above unchanged, not too bad of an accomplishment considering the extent of the selling hit the broad equity markets. That is no doubt related to the strong showing of gold when priced in terms of the various European related currencies. It is going to be insightful to see if gold can maintain a foothold above the €800 Euro level and the €730 level in British Pound terms.
Gold is continuing to attract buying above the $1,100 level which is becoming more significant from a technical perspective. It’s range trade continues with the bears having the short term advantage. Bulls need to push it back over $1,120 to force a bit of minor short covering. The 10 day moving average has turned lower which is near term bearish but I want to add that markets in ranging or consolidation patterns do not generally pay much attention to moving averages but more so to those particular technical indicators such as the Stochastics which are designed for that pattern.
As far as the Dollar goes, it continues its ranging trade with the bears simply unable to take out the support level under the market and force a bout of long liquidation which would feed on itself as the froth in the market just keeps foaming. The problem for the bears is that Europe just will not cease occupying the minds of currency traders and that keeps sellers coming into the Euro, the Pound and Swissie which then begets more buying in the USDX. This is going to be resolved one way or the other fairly soon but for now, the 6 week long trading range continues.
The mining shares as evidence by the HUI are succumbing to the broad equity market weakness. So far they have been able to hold last week’s low but they are dangerously flirting with that level. A breach of that would allow sellers to take the index down towards 405, which is the 40 day moving average. They will need to hold that level or run the risk of a move towards 390. From what I can see of the HUI, it too looks like it is stuck in a trading range like so many of these other markets.
The long bond is also stuck in its range bouncing off the low end of the band that has contained it for the last 2 months.
DAN'S CHART:
http://jsmineset.com/wp-content/uploads/2010/03/March1510Gold.pdf
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