Gold: an alternative “Band-Aid” strategy—rather than going neutral

Michael Oliver’s Momentum Structural Analysis, Dec. 11, 2017 (www.OliverMSA.com)

Over the past month we’ve specified that a weekly close below $1245 would put us neutral. Gold’s annual momentum is positive, period. It shows no signs of a trend turn back to the downside, just a pullback currently in the positive pattern of the momentum readings. 

But many other, lesser trend indicators are headed down, and once again many gold bulls are afraid “It’s going to new lows!” and so forth. The same sort of negative vibes that gold bulls experienced at least a few times in the past year or so. On rethinking this situation, we propose another approach for those who are not buy-and-hold longs (based on annual momentum). 

We’ll begin to explain the alternative process with monthly momentum and some observations. Then we’ll drop down to a very near-term situation and fit the two technicals together. Finally, the simple strategy itself. 

3-month average oscillators (and we don’t care which market we’re dealing with) will generally swing in three- to six-month moves (in the momentum bars, counting from and including low bars to highs, or high bars to low). In fact, we exaggerate a bit, because six months from peak to low/low to peak is extremely rare; in fact there are no examples on the momentum chart shown above that lasted longer than five. It’s more realistic to say that five months up or down is stretching it. 

Daily Momentum

Whatever price pain or pleasure you’re going to get will likely be dished out in that time frame. So let’s consider that “the clock.” 

So does that mean gold downside might have another month to go? Maybe it could reach six (not so likely), or perhaps another month left, into January. Yes, it’s a possibility. 

So with that archival technical information in front of us, let’s assume that whatever nasty we think is going to occur, it will likely occur between now and the end of next month. 

That gives us a time frame of vulnerability. Oh, sure, gold could halt, produce several months of rally/stability (a sequence of up bars), and then try downside again, but continuing this decline much beyond January isn’t likely. 

However, despite being oversold on daily, we don’t think the rally will stick. Most likely resistance is around $1260. If you’re a nervous long and didn’t establish your base or core position back in early February 2016 (when gold was moving up through $1140 and GDX was between $15.5 and $16), then your sense of vulnerability must be palpable. So if the daily rally occurs, we suggest that it be used to hedge via put options on your gold or miner position.  If you feel the need to hedge, due to our assessment that the window of vulnerability is likely only open through the end of January, we think there’s no need to pay up for puts that expire six months from now. February GLD puts (which expire the third Friday of February) should more than cover the clock of this decline, assuming there’s any more, which is entirely possible.

Jay’s Comments: Last week gold closed at $1,245.20 or a mere $0.20 over the line in the sand drawn by Michael Oliver that would have caused him to turn from gold bull to neutral on the yellow metal. It’s not yet definite, but with gold closing at $1,257.50 on the near term contract, it looks as if for a third time this year, Michael’s work may have kept us nervous gold bulls from jumping ship at just the wrong time. The jury is still out but it’s a lot more hopeful this week than last. Stay tuned!

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