Who Sold Today and is it Safe to Buy?
- a large player sold gold post referendum
- the seller was likely a Fund hoping for a pop
- We get an RSI non-confirmation that may indicate another slow relief rally
Background
Last night as the italian referendum came in we noted a few things that bear repeating now that Gold has taken it on the chin. In this way it might be easier to understand the move lower today after an allegedly bullish event.
We said last night:
This lack of piling in is a good thing for Gold investors. Do not be surprised if Gold actually sells off from this event as traders close positions in everything.
The key word was investors. Long side traders should have been worried. We also said this:
Therefore, you will not likely see much volatility to the upside as traders have squared their spec books for the year for the most part. It's the hottest and smallest money in Gold now.
What we should have added was "from the long-side" at the end of the statement. While it may have been obvious to us, it may not have been to the reader. In more detail that means longside traders like asset allocated funds were probably not in a position to add. Further that implied less volatility to the upside, as only smaller players were willing to punt long on the Italian referendum.
We then said after Gold turned negative last night
Since then Gold has turned negative on the evening. We are not concerned and note this is all about flow/ short term day trading now.
It's the hottest and smallest money in Gold now. Fickle, small, players and day traders will move the market on light volume until new asset allocations are made at investment houses. When new moves happen on bigger volume, we will pay more attention to follow through potential.
To clarify:
- flow traders are not small players, they are banks and prop desks who by nature front run their clients or other origin order they see
- Day-traders are small by comparison
- existing long funds still remained that might need to sell, but no new fresh money was forthcoming in on the long side
- large volumes lower are not a surprise. Large volumes higher would have been
From our friends at zerohedge:
The Italian referendum's "no" vote sparked the rational reach for safe-havens as the Euro-endgame became more questionable... but that lasted less than an hour and since the $1190 highs overnight, gold has been monkeyhammered to 10-month lows amid two legs lower (EU open and US open) with spikes in volume of around $3.5 billion notional...
full aticle HERE
So, who sold? That leaves existing longs and flow traders who take the other side of client orders as potential sellers. And neither of these is light volume. There is a back pattern at play here. Past recent liquidations have been in 2500 lots. Usually they hit in 2 chunks of 1250. So when you factor in ZH math and the usual add-on of copy cat sellers, front runners, and momo funds, 2500 sounds about right to us again. If this "2500 lot in 2 trades" pattern continues much longer we would have to rethink if it as a fund at all, and move to a bigger type long...maybe an EU Sovereign Wealth Fund that is loading up on stocks like Norway??
BBG- December 1The central bank’s board, which oversees the fund, on Thursday recommended an increase in the equity share to 75 percent from 60 percent. That will raise the expected average annual real return to 2.5 percent over 10 years and to 3.5 percent over 30 years, compared with 2.1 percent and 2.6 percent, respectively, under the current setup.
We hope not, but must acknowledge the possiblity.
Who Sold Today
Short Version
Best candidate is a long fund that had not yet liquidated and may have hoped for a nice pop in gold price and liquidity to sell into post referendum. They didn't get it, and decided it was time to close the books on their bet.
Had To vs Wanted To
We're not married to the above idea. Who actually sold is irrelevant to us as traders. What truly matters is that anyone long that sold did so most likely because they HAD to. And they were the weaker hands after the referendum fizzled for Gold. Last night's activity clearly looked like a bear market rally and give-back on what was bullish news. Incredibly, there aer still trapped longs. Although we suspect dealers did not help them much.
As in an earnings event: If bullish news doesn't make a stock pop, it's likely a sale. Today saw some decent volume in moves lower. So who is the seller? Most likely someone who HAD to trade Gold. Not someone with discretionary capital and WANTED to trade Gold
Who HAD to trade Gold today?
- Larger funds still long who haven't puked yet- those that would HAVE to trade if a stoploss were triggered or EOY liquidation demanded it
- the bullion dealer/prop/ flow types- those that also HAVE to trade given some customer flow to handle
2016 Clock Runs Out for Long Funds
This is a recipe for a spoof lower to flush out remaining vulnerable longs. Even if it is not spoofed, any size flow will have to hit the screen either directly by the seller, or by the OTC flow trader who took down the size and needs to lay it off. That is what likely happened today.
If it was a fund that was hoping for a rally to sell into that just threw in the towel it makes sense. If the screen volume was a bank dealer selling after being "given" size OTC and needed to aly off risk, that also makes sense. Finally, it is also possible that some MOMO funds (profitable and thus active) are playing short side and are adding to the carnage.
Recipe for a Slam
- Bullish event occurs
- Market rallies on light volume, then gives back all gains
- Trading conclusion: downside vulnerability is large.
- Trader waits for a client to call looking for a market, or trader tests market for strength.
- Either way, the bias is lower for traders
Safe-ish to Buy
We may be looking at a short term swing trade higher setting up. Our last signal gave a relief rally that took Gold from $1250 to $1301. It was a strong trade as it was accompanied by a non confirmation in the RSI.
Last Signal Non-Confirmation in Gold Worked nicely
This gave traders a $45 profit, and is marked of in the chart below.
We are seeing it again, but are not so sanguine due to many long side players not getting their allocations yet. Combine this with seasonal lack of liquidity, and we aer skeptical. That said, the tradeis to buy Gold around $1168 with an $1158 stop loomking for a rally to $1197. This is a 3 to 1 risk reward, but admittedly the stop loss is wide for our taste. Still the RSI is a good barometer in counter rallies form oversold positions in Gold
interactive chart HERE
How the day ends, and for us, how the week ends will give us a better stop level for our own potential entry. For now, we merely point out that the RSI trade signal is given, and being long here is the position for intermediate term traders. We want to see how the market reacts to another press lower, and may miss as a result.
Spread Contracts
- Gold-silver ratio 69.95- Silver is the best house now
- gold-plat244.10- Platinum is consumed
- plat-pall 187.20
- Feb-April Spread 280/290
good luck
Read more by Soren K.Group
