Technical Gold: Long through FOMC, Reassess Pre-election

Gold

Technical Brief: Go With the Flow. Always Have an Exit.

Gold is in a corrective bear flag still
A settlement above $1289 breaks the bear flag
Dips holding above $1262 (oct 28 low) will form minor bull flags for test of $1302 area

From October 9th

Risk $10 to Make $40-On Oct. 6, we noted that technically, Gold was about to offer up a "Bounce or Die" trade (original post here). Then on Friday, the weekly close gave the signal that the first trade was to be bullish.
We are suspicious of V-shaped bottoms in Gold but honor the technicals and acknowledge our own subjectivity. Our personal preferred trade is to Sell the $1200-$1250- $1300 butterfly, with the objective it will go out worthless. The assumption is we will not be at $1250 in 30 days. Limited risk, limited reward. Set it and forget it

Today's Drivers

On today's action, Gold is now above the $200DMA and is approaching the 50DMA level. The observable reasons are pretty straightforward. Increased anxiety as the election draws nearer is chief among them. As we move towards election day event risk increases in the form of potential emails, FBI probes, and gaffes by either candidate. Election day itself will be another poll, a barometer of the crowds feeling at that moment. A coin flip between lesser evils.

The Fed also began its meeting today, and if the past is any prolog, nothing will happen. The Dollar's strength will likely make it even harder to justify raising rates, which may have been the point of their jawboning. Further the Fed is politically compromised, and either way they will be condemned. The concept of doing nothing until December (if at all) might seem more attractive based simply on the optics of the situation. Inaction is more easily defended than action considering that they have done nothing since last December, it would make sense to stay the course. Even if that course is straight towards an iceberg.

Dip Buyers Pass the Baton to MOMO Funds

We see the pick up of momentum today as noted by Peter Hug, and quantified by our own Vol BreakOut System (VBS). On a momentum basis, VBS is saying to get long today on a settlement above $1278. How you pick to do so is up to you. Conversely, we see from our own market observations that some "value" traders who bought in the $1250 area are starting to sell to momentum funds entering the market on the break above the 200 DMA. This should be reflected in 2 ways. First you will see more sloppy buying into strength as "triggers" go off. Second you will begin to see open interest (OI) go up.

Interactive chart HERE

By the Numbers

Prior analysis said long at $1250 with a $1300 target and a $1242 reversal
Now the Support/ Resistance numbers are $1262, $1278 (200DMA-ish), $1289 and $1300- $1302

Gold is in a corrective bear flag still
A settlement above $1289 breaks the bear flag
Dips holding above $1262 (oct 28 low) will form minor bull flags for test of $1302 area
We think sell stops will begin to accumulate right under the 200 DMA by momo funds

Who is Selling?

We know the buyers are Momentum Funds. If the sellers are longs that bought from below then Open Interest (OI) wont move much. When OI starts to spike, then you are seeing Commercials and Bullion Banks with flow lean into momentum buying. At that point it becomes a battle of balance sheets. Who can hold onto their bets longest, the momentum funds, or the Commercials? Historically, Commercials win at both extremes, but how far the market stretches first is key. These things are reflected at market tops and bottoms in RSI and stochastics as well.

Be Thee Value or Momentum Trader?

For now, this looks like the beginning of a momentum phase. Our VBS level to enter is a settle over $1278. So if you bought at $1289 today, you'd be risking $11. Therefore you'd want a 2 to 1 risk/reward ratio. Your target would be $1301. This is sketchy for the "value" part of us. Especially while the Fed meets.We recommended buying and holding Gold in the $1250 area with a $1297 target in this October 9th post. We then updated the situation here . And we personally bought Silver in the same area on the chart in futures and coin form. So having done the "value" trade, we are hard pressed to do the VBS momentum trade.

Frozen Fed

That said, with all the electoral chaos, the right trade is to BE LONG GOLD through the FOMC and reassess pre-election. Why? Because the Fed is almost definitely not going to act. How can they? If stocks were screaming, maybe. But they are not. In fact stocks are looking very sick. Therefore we will simply raise our stop on the futures position to $1278 in a compromise. The Silver coins aren't for sale. But the VBS is saying momentum is just getting started.

From the Article: Gold Trade: Long above $1250 with $1300 Target- here's why