Ok…now, I am going to post up the analysis I did to gain an understanding of market bias from a fundamental and market sentiment point of view on gold, and the euro (specifically the eur/usd)
I will do this for every market I trade, the day before I trade it. If I do not have this degree of analysis conducted, I simply will not trade that market that day (oh! there’s another rule!)
To acheive this goal will require the utmost prudence… it will require me to be as responsible as possible.
Therefore, to risk any of my account on anything less than the most complete degree of preparation is either reckless or lazy.
And reckless, lazy folks don’t acheive lofty goals or impressive market success.
Without further ado - here’s the analysis:
Interest Rates of the G7 Currenies (AKA, majors, major crosses, comdolls)
1.US Federal Reserve Bank (USD) - 0.25%
2.European Central Bank (EUR) - 1.25%
3.Bank of England (GBP) - 0.50%
4.Bank of Japan (JPY) - 0.1%
5.Swiss National Bank (CHF) - 0.0%
6.Bank of Canada (CAD)- 1%
7.Reserve Bank of Australia (AUD) 4.5%
Notes on fundamentals:
Gold - Factors primarily affecting gold - (in order of importance)
euro instability: more unstable = bullish for gold (risk off trade)
euro union possibly liquidating gold reserves to “raise capital” = bearish for gold
These two mentioned above are the primary drivers in golds current value. The
two below are secondary:
world interest rates at record lows = bullish for gold
inflation: primarily in the U.S. Euro zone, and Asia = bullish for gold
Summary -
gold is being accumulated by larger institutions as a hedge primarily against euro
instability. If instability increases, gold will likely push higher. If EU countries
start liquidating gold reserves, this will likely put a short term pressure downward on
on gold
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Notes on sentiment:
right now, 21 out of 22 surveyed by bloomberg expect gold to rise next week.
this is the 3rd consecutive increase and highest proportion in data going
back to 2004.
- Interesting to note…sentiment extremes typically (always?) foreshadow
a reversal - at least in the short to medium term.
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COT and gold
Commercial holdings have hit a record net long back around oct 21st, when gold was
priced at around 1650. Since that time, commercials have been selling off, while large
traders have not greatly increased their net long positions. Small speculators have
greatly increased their net long positions however.
Summary: Gold is not only overbought in the short - medium term (1 week to 6 weeks),
but it looks as though the small specs have primarily been fueling this rise in gold prices.
Since small specs are the least influential group, and commercials are the most influential
group, it stands to reason that gold will be selling off a bit.* - it is possible
that my COT analysis is not very accurate in this case, as the driving force behind
supply and demand in gold is primarily speculative (so how relevent are commercials?)
and my understanding of COT is not as complete as I would like it to be, in order to
accurately gauge all but the most extreme overbought/oversold conditions.
Overall gold summary:
Sentiment in gold is extremely bullish… too bullish IMO. COT indicates a potential extreme
situation, and overall market survey bias is just too bullish (with everyone in, who
is left to buy?).
Combine this, with the progress (at least for now) made in the last few days in italy
and greece, and with the rumors that soverigens may start to sell off gold reserves to
raise capital to keep the EU afloat for now… it stands to reason that gold will be
pulling back this coming week, unless the EU situation takes a big step backward.
Technical levels of interest:
1791.2 - fridays high. Long stops will be above this price. Institutions will likely push
into this at a minium to gain liquidity needed for a short position.
1794 - a level that crosses previous daily lows: not the strongest level…but look for
PA and volume indications of a reversal. May take a small intraday trade here on gold
to the short side, based on PA and volume when price arrives at this level
1800 - major psychological level. Unlikely to take a trade here, as there is not enough
confluence
1804 - the level I feel most intersted in taking a short from. I will put a "set and forget
order here for a short, stop 1815, target 1780. I will cancel this order if gold hits
1780 before reaching 1804
1825 - another level I will place a set and forget order at. Stop 1835, target 1805, 2nd
target 1781.
Once PA and volume indicate that gold has topped out, I may take some short trades with
the “new trend” to the downside, as long as these trades can be entered above the 1750
price point.
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THE EURO
Notes on fundamentals:
Euro - Factors primarily affecting euro - (in order of importance)
euro instability: greece and italy are the centerpoints, along with italy/greek bond rates (high yields are bearish for euro)
Italian PM Berlusconi stepped down, and change is hailed both in and out of italy as positive for economic stability
italian austerity legislation - quick and complete passing of this will be bullish for euro
These two mentioned above are the primary drivers in Euro’s current value. The
two below are secondary:
euro union GDP: up 0.2%, lowest level since june 2009 when it was contracting. Bearish for euro
euro union interest rate: the 0.25% surprise cut recently is bearish, but that does not change it’s relative place among all
major currencies (still paying 2nd highest rate, besides AUSSIE)
Summary -
euro has cleared a major stumbling block by pushing out the old guard with regard to italy/greece. Now the follow through
must be quick, and without hangups. If there are hang ups or glitches, we can expect the euro to find resistance. However,
going into monday, the state should be positive if nothing majorly upsetting comes to light.
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Notes on sentiment:
as of last wednesday, 3 out of 4 hedge fund managers were “reluctantly net short” the euro. As of friday, we rallied.
I doubt all have covered as of this recent rally, and if the majority are still net short, combined with
recent positive news, i doubt others will be jumping to sell right now. Interesting to note, small speculators are net short.
they’re usually wrong… last week could be a short term bottom on the eur/usd: at least for the next day or 2.
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COT and euro
Commercial holdings have just backing off a record net long last hit around June 2010.
Large specs are pulling back from a record net short last hit june 2010. Small speculators
are net short.
Summary: Not as clear as the gold COT charts…but there is some evidence that an upward move in the euro
against the dollar is more likley than more downward action, at least for this week.
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overall euro summary
The euro looks to gain strength against the USD. This will place it in the middle of the pack, if not higher
against the other major currencies for this coming week. positive steps have been taken, and this should
take pressure off the eur/usd at least for the next 24-48 hours. ALthough a bit wary, I’m biased more to the
long side than the short side of the euro against the USD
Technical levels to watch:
Long trades only from these levels
1.3650 - top of a fresh daily demand zone
1.3610-1.3590 - to be entered only if PA and volume indicate a reversal. must be aggressively
managed and small profit targets only.
1.3560-1.3540 - ideal zone to enter a long trade.
1.3525 - 1.3480 - another great zone to enter a long trade.
Jay