As we come to the close of another low-volume, choppy options expiry week, I believe a big move is in the works.
At the moment, everyone seems to be in love with gold. But, as I mentioned last week, I think we are headed for a sharp correction. Previously, I pointed out that we needed gold to make a new high to the $1275- $1285 area before everyone piles in and gets married to the shiny metal; only then will the market reverse. Remember, the market is out to take money from the masses, and the gold trade is getting a little crowded for my taste.
There are fundamentals that can be taken into account, but when has any investment moved perfectly in line with the underlying fundamentals? I’ve seen investments lead fundaments by years, and at other times lag the fundamentals by years, not to mention manipulation (but that’s a whole different subject). That being said, I don’t hold gold long term for the simple reason that I don’t subscribe to the buy-and-hold strategy, nor do I like to watch investments go much more than a few percentage points against me. I would rather sit in cash jumping in and out when things look ripe for the picking.
Gold Futures Price – Daily Chart
As you can see, gold is forming another rising bearish wedge. The previous one, which occurred earlier this year, led to a $100 drop in gold. The part that I find exciting is that this recent run-up has been on relatively light volume and without any decent pullbacks along the way.
What does that mean? It means fewer people are willing to pay top dollar for gold, and the big money is riding this train up until they feel it’s running out of gas, and then they will start unloading large amounts at a premium. We also just saw another new high on Thursday, which happened on light volume, and that tells me this rally just may have the herd all rounded up before the slaughter.
Silver Futures Price – 15-Minute Intraday Chart
While I don’t trade silver as much as gold due to the added volatility/whipsaw action, this intraday chart started showing signs of weakness Thursday, with a rising bearish wedge. This is just an intraday chart, but these short-term patterns tend to lead the longer-term charts, pointing out that exhaustion is starting to creep into the market.
Both gold and silver could still have a blow-off top and shoot up, which is why I have been saying to stay long metals (if you have a position) and to keep raising your stops as it could continue higher for some time if a new wave of buyers step in.
Crude Oil – 4-Hour Chart
Oil has been choppy recently, making it difficult to get a good read off the chart. Currently, it is testing support and looks to be forming a possible right shoulder. It could have some good potential to the downside if we get a neckline break. I’m keeping my eye on it for another low-risk entry point.
SPDR S&P 500 ETF (SPY) – Daily Chart
The SPDR S&P 500 ETF (SPY) chart clearly shows some extreme bullish sentiment levels in the market. The bottom indicator is the total put/call ratio, and when it is below 0.80 in an environment like this, it means there are too many people bullish on the market. So with Thursday’s spike low, it’s easy to tell that the majority of traders/investors are bullish as they buy all the call options they can.
That being said, we generally get a serious shake out before the market reverses. What I mean by that is we should see the market gap substantially higher or spike up intraday as key resistance is broken. This forces all the shorts to cover their positions just before the market rolls over and sells back down. That’s what I am looking for to take action.
Trading Outlook
In short, gold and silver are looking and feeling toppy here. While I am bullish on them long term, we could see sharp pullback that could take months to regain these prices. I am not short metals yet, but very close to taking a short counter-trend trade.
Oil continues to looks bearish, but is taking a long time to play out. This is a four-hour chart, and if we do get this neckline breakdown, it would still take one to two months to pay off. That being said, it looks like it will go lower.
As for SPY, I think the chart gets the point across. The important thing to know is that it should go another 0.5% – 2% higher before it goes lower, as that would make for a perfect pop-and-drop reversal pattern, and I will alert members to when the time comes to short.
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