Gold Is King During Times Like This

Summary

• Looks like we are getting a buy signal in gold. If we get back to $1655.
• What we have seen recently is an inverted top for silver at $17.61.
• The market is extremely overdone across the board, including gold mining shares, which are an incredible buy, while the equity markets are offering traders the possibility of a spring rally.
• Looking for a portfolio of ideas like this one? Members of Mean Reversion Trading get exclusive access to our model portfolio. Get started today »

Fundamentals

The last few weeks, the stock market has been falling apart in the face of the coronavirus news. It took time for the equity market to realize the implications of the virus and that the implications economically are uncertain. Right now we are seeing panic in the marketplace, which is causing an incredible amount of volatility across the board.

Gold mining shares, even some of the precious metal ETFs, are being influenced by the stock market. They are being traded as shares, of course, regardless of the sector. We should be patient with this and allow the volatility to calm itself. We should let everyone who should not be in the market get out. It will clean the market of a lot of buyers who came in recently at the top of the market. There are still a lot of people still short in the equity markets who are waiting for a rally to try to liquidate their positions. If you look at every major correction that we have had, the markets always come back. What such corrections represent are major opportunities to add to your positions.

The VC PMI

The Variable Changing Price Momentum Indicator (VC PMI) provides a reliable metric to rely on to trade the markets, even when they are highly volatile. The algorithm is written in C++ on the TradeStation platform. The artificial intelligence behind the algorithm relies on reversion to the mean, and creates a five-level Fibonacci structure from which to trade. On the left of the chart are the five levels, two blue, one green, and two red. The green level is the average price for the day. The Buy 1 level is $1654 and the Buy 2 level for today is $1653. The mean represents the point where there is a 50/50 chance of the market going up or down, so we do not recommend trading from that level. The Sell 1 level is $1700, and there's a 90% probability of the market reverting back to the mean from that level. Coming into this week, we already have targets from the VC PMI in place.

We do not use straight stops. We use the 15-minute bar close, and depending on how aggressive you are, you can use the close below the level where the market activated a buy signal, which is the most conservative. Do not go short from Buy 1 or Buy 2, because there are 90% and 95% probabilities that the market will run back up from those levels, and only 10% or 5% chance that the market will go down from those levels.

Precious Metals - Gold

Courtesy: TDAmeritrade

Looks like we are getting a buy signal in gold. If we get back to $1655, then we will have a buy trigger. A close above $1654 would activate a buy signal. The mean is $1679, which then becomes the target.

In silver, we see that silver has been lagging gold. The gold-silver spread has favored gold as gold has rallied. What we have seen recently is an inverted top for silver at $17.61. For gold, our annual target is $1655 and we traded as high as $1704. The second target that we published back on Sept. 28, 2019, when the market was at $1500, was $1655 to above $1800. The correction that we have seen is very bullish for the price. Had we gone up into the mid-$1700s now, it potentially would have completed the annual target for the rest of the year. That would have created a bearish pattern for the rest of the year. What has happened, is that this correction, whatever the cause, is basically very healthy for the market. It eliminates a lot of weak buyers in the market and a lot of speculation. It makes everybody confused, the perfect time to build a position if you are looking in the intermediate term. The equity markets also are at a point of capitulation, providing an incredible opportunity.

The average silver price is $17.07. The daily price is at $17.07 and the weekly is at $17.09, which is what we call a harmonic relationship since they almost match. Silver came down into that Buy 1 level, close to the daily 53, and came down to the weekly buy level of $16.51 which we published on Saturday. The target is the mean, which was completed on the 9th at 4:15 am.

Since then, we have been hovering around the mean. If we close above $17.09, it will activate the daily and weekly trend momentum. The targets would be at $17.60 to $17.75. On the extreme below the mean, the weekly is at $16.61, which was the entry point. Below that is $16.53 for another buy level. The numbers are aligned daily and weekly. We may come down to $16.53, but be prepared for a reversion or buyers to show up at these levels.

E-Mini S&P

The E-mini is all over the place, of course. It has been skewed by this volatility. If we just look at the numbers, let’s see what they are telling us. The average price is 2793 coming into today. The Buy 1 level is 2670. The Buy 2 level is 2592. The extreme level above the mean is 2871 to 2954, for the Sell 1 and 2 levels. The current market is trading above the daily average of 2793. We came down yesterday to make a low of 2695. Then we reverted right back above the average Buy 2 weekly level. It activated a weekly buy signal on all the indices. We recommended to take a long position for our aggressive traders who trade the futures contract. The signal met the target right away and met the extreme level above the mean daily. The Sell 1 daily is at 2871 today, and it contradicts the Buy 1 weekly at $2856. We took profits this morning, and we are now neutral. Now we are waiting for the market to either come down to test Buy 2 at 2749 or it’s going to go above 2850, which is the Buy 1 weekly level and start to enter into the area of resistance on the daily. If we close above 2994 to 2996, it would be setting the market up with a bullish trend momentum. Then we are looking at daily and weekly indicators joining together, which could bring in a lot of buying and short covering. The market is extremely overdone across the board, including gold mining shares, which are an incredible buy, while the equity markets are offering traders the possibility of a spring rally back into the 3,000 area on the E-mini, and even up to 3245, which is Sell 2 level and is in play for the rest of the week.

Prices are in an area of demand in the daily chart. I feel comfortable that the algorithm appears to have capitulated on this down move, and we are looking for reversions to unfold from these levels.

Leave Emotions at the Door

Try to use objectivity, not emotion, to guide your trading. The market is going to create a lot of confusion and emotion. If you think of the fundamentals with the Fed lowering interest rates half a point even before the next meeting, it's a pretty convincing sign that they know that this is a black swan that's going to change the paradigm that we have been used to in relation to interest rates. I don’t think there are too many options available to combat this potential recessionary black swan that we have coming here. We don’t know the damage that has been done. We are going to have a lot of uncertainty in the market for the foreseeable future.

The Fed is going to have to lower interest rates, at least to zero, to bring some confidence back into the market. Will it be enough to support the markets? We haven’t seen any economic growth as the result of this policy in Europe or Japan, and I don’t know why the US would be any different. Twenty years ago rates were 6 or 7 percent average or in 1981 when the 30-year bond was at 14%, it's amazing that we are now at almost 0% and possibly negative. It's hard to believe, but here we are. If you really think about the consequences of such rates, the future looks pretty dire. A percentage of the population relies on interest income, including pension funds. The implications are beyond comprehension. The coronavirus uncovered the weakness in the system, and the damage that the Fed’s policies have inflicted on the economy since 2008. The future is going to be very uncertain. People talk about gold reaching $10,000, but I don’t think people understand what it means for gold to be at that level, if it reaches that level. As much as I love gold and trade it, I'm puzzled over what it could be like if gold reaches $10,000!

I strongly recommend accumulating precious metals and derivatives depending on your size and profile. I think we are headed for a test of government economic policies, not only here in the US, but on a global basis, because of this tremendous record debt globally. I think this is a fantastic opportunity.

Analyst’s Disclosure: I am/we are long NUGT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.