All statistical research and signals are being generated by my proprietary platform, Alchymist.
Alchymist is a Trading and Research Portal for trading Futures and Commodities. It contains decades of price and position data across 55 of the most actively traded futures. With a user friendly Front End Interface to easily access this data, traders can ensure they are trading with an edge and placing the odds in their favor before each and every bet.
I had been bullish Gold from June through Sep 3, and warned on that day that a correction was likely forth-coming. Things played out as expected, and the bear put-spread entered at that time has helped to manage this draw-down. Please see prior posts for details.
Now, we are seeing evidence that the decline is abating, and if this is the case, it would mean a higher low is in place & rally should commence. If we do rally, then there are 2 scenarios:
A - We are making a higher low, and Gold is on it's way to challenge recent highs @ 1362.
B - We are in a new intermediate downtrend, but it is time to retrace this first wave down.
A standard 50% retrace would take us to around the 1315 level. Challenging highs would take us back to 1362. So we are looking at potential gains of $45 in the bear rally scenario; In the bull scenario we are looking at a $90 rally.. Either way is quite a bit of juice, so lets take a look at the setup.
1 - Gold has hit the 61.8% retrace level of the preceding Rally.
2 - Oscillators are oversold & signaling a bounce.
Alchymist's Proprietary Scoring system for the Disaggregated report released by the CFTC each week looks at Participant activity and positioning and factors in a volatility/weighting component to Score this on a 18m + 5yr basis.
What we see here is that Swap Dealers are holding 88k longs, and on a 18month and 5yr basis this scores a 92% out of 100. So rarely do we see the swap dealers holding this heavy a long position, and what we see is significant statistical outperformance given this setup.
Since 2006, over 2,900 trading days, we see that the 70th Percentile Movements in Gold on any random close over a 20Trading Day period is $20 up and $(16)down. When Swap Dealer Long Positions Score 90+ as we have currently, the 70th percentile moves to 28up vs (13) down. So odds move in bulls favor from 5-4 to now 2-1 - A significant statistical edge versus the baseline actuarial data.
4 - Fundamentally speaking, we are in the historical heavy physical demand season in India. So gold is on sale, and Indians will be on the buy in the coming weeks.
Given this setup, a long bet is in order - Here is how to play it.
Go long 1 Dec Future @ 1269.
Buy the Jan2018 1270-1200 Put Spread (buy 1270puts + sell 1200 puts) - This will cost approx DR $21.50. This hedge is good for 112 days. We've chosen this level to hedge because a drawdown to 1200 would = a $160 selloff in Gold. Over a 40Trading day interval (current Drawdown is 20trading days) a $160 drawdown would have exceeded over 90% of all observed drawdowns since 2006.
Upon a rally of approx $30, sell a call 50-75 out of the money - You will collect about $9 for this..
So our economics are:
1 - $100 of upside on the Future from 1270 up to 1370.
2 - Your Put spread hedges you another $70 down for a cost of $21.50. Your short call will net you $9. So net cost of hedging is 21.50 minus 9 or 12.50
3 - This gives us a Risk/Reward profile of over 7-1.
In the event this trade is early and Gold continues to plummet, cover your short 1200 puts on a hourly close below 1215. While this will skew our R/R profile slightly, it's more important to ensure you are fully hedged in the event Gold enters a significant down-leg.
Good Trading to All.
Alchymist is a Trading and Research Portal for trading Futures and Commodities. It contains decades of price and position data across 55 of the most actively traded futures. With a user friendly Front End Interface to easily access this data, traders can ensure they are trading with an edge and placing the odds in their favor before each and every bet.
I had been bullish Gold from June through Sep 3, and warned on that day that a correction was likely forth-coming. Things played out as expected, and the bear put-spread entered at that time has helped to manage this draw-down. Please see prior posts for details.
Now, we are seeing evidence that the decline is abating, and if this is the case, it would mean a higher low is in place & rally should commence. If we do rally, then there are 2 scenarios:
A - We are making a higher low, and Gold is on it's way to challenge recent highs @ 1362.
B - We are in a new intermediate downtrend, but it is time to retrace this first wave down.
A standard 50% retrace would take us to around the 1315 level. Challenging highs would take us back to 1362. So we are looking at potential gains of $45 in the bear rally scenario; In the bull scenario we are looking at a $90 rally.. Either way is quite a bit of juice, so lets take a look at the setup.
1 - Gold has hit the 61.8% retrace level of the preceding Rally.
2 - Oscillators are oversold & signaling a bounce.
Alchymist's Proprietary Scoring system for the Disaggregated report released by the CFTC each week looks at Participant activity and positioning and factors in a volatility/weighting component to Score this on a 18m + 5yr basis.
What we see here is that Swap Dealers are holding 88k longs, and on a 18month and 5yr basis this scores a 92% out of 100. So rarely do we see the swap dealers holding this heavy a long position, and what we see is significant statistical outperformance given this setup.
Since 2006, over 2,900 trading days, we see that the 70th Percentile Movements in Gold on any random close over a 20Trading Day period is $20 up and $(16)down. When Swap Dealer Long Positions Score 90+ as we have currently, the 70th percentile moves to 28up vs (13) down. So odds move in bulls favor from 5-4 to now 2-1 - A significant statistical edge versus the baseline actuarial data.
4 - Fundamentally speaking, we are in the historical heavy physical demand season in India. So gold is on sale, and Indians will be on the buy in the coming weeks.
Given this setup, a long bet is in order - Here is how to play it.
Go long 1 Dec Future @ 1269.
Buy the Jan2018 1270-1200 Put Spread (buy 1270puts + sell 1200 puts) - This will cost approx DR $21.50. This hedge is good for 112 days. We've chosen this level to hedge because a drawdown to 1200 would = a $160 selloff in Gold. Over a 40Trading day interval (current Drawdown is 20trading days) a $160 drawdown would have exceeded over 90% of all observed drawdowns since 2006.
Upon a rally of approx $30, sell a call 50-75 out of the money - You will collect about $9 for this..
So our economics are:
1 - $100 of upside on the Future from 1270 up to 1370.
2 - Your Put spread hedges you another $70 down for a cost of $21.50. Your short call will net you $9. So net cost of hedging is 21.50 minus 9 or 12.50
3 - This gives us a Risk/Reward profile of over 7-1.
In the event this trade is early and Gold continues to plummet, cover your short 1200 puts on a hourly close below 1215. While this will skew our R/R profile slightly, it's more important to ensure you are fully hedged in the event Gold enters a significant down-leg.
Good Trading to All.
