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Golden Shorts If Stocks Pull Back



If stocks start to make their long anticipated retest of support, all kinds of opportunities arise from this very extended rally. Here's just one.

Check out this daily chart for gold.

Question: What's missing from this picture?

Gold Daily Chart- Chart Courtesy of AVA FX (11 Nov 19)

Answer: Nearby support.

Significance – Big Juicy Shorting Opportunity IF Stocks Pull BackBackground

Gold has been on a tear, up almost 10% in less than 3 weeks.

Reasons include:

· A continuing decline in the US dollar

· Rising optimism about the recovery igniting inflation concerns

However, these factors have been present for most of 2009. What really got the party started?

India.

The Central Bank of India bought 200 tons of bullion from the International Monetary Fund. The IMF thought they were getting a great deal, selling their bullion at the "height" of the market in order to raise cash to help struggling nations.

However, the market disagreed, and saw this central bank purchase as a sign of more such transactions to come, as exporting nations holding depreciating dollars seek to diversify. So far, the markets have been correct. On November 18th, Mauritius bought 2 more tons from the IMF, as gold's wild ride higher has potential buyer afraid of missing the run. Self fulfilling prophecy?

The Harder They Come…Explanation of Relevant Support

Gold generally follows stocks. If stocks continue to pull back, so should gold. Because gold has risen so far so fast, there are no significant points of support until about 1020, where prices took a brief stop at that level around November 11th, and where the first Fibonacci retracement level forms.

Fibonacci retracements are a common support/resistance indicator used in technical analysis, and are typically drawn from a nearby swing point, as shown above and marked by the 100% label from late October. After that, we don't see another convergence of both price and Fibonacci support until about 1070-1060.

The Potential

Gold is currently around $1134, allowing for a very juicy drop of $60+ dollars or over 5% (if stocks even make a modest pullback, as a wave of late-coming "long gold" traders need to sell gold to limit losses. Per recent COT (Commitment of Traders) reports, speculators have remained overwhelmingly long gold, creating potential for a nasty correction (again, IF stocks pull back).

Traders using typically available 100:1 leverage from online commodity brokers can take a major chunk of that potentially 500% profit, assuming they trade intelligently, manage risk and are adequately capitalized to avoid a premature margin call (the 100:1 leverage can cut quickly against those insufficiently capitalized and trained to manage this risk).

Other Juicy Shorts

Any asset that has seen a long steady rally over the past months fueled by lots of hot short term money is also ripe to deliver returns of note. The currency markets (or ETFs that track currencies) are full of these, given the still extreme oversold levels of the US dollar, which is involved in well over 70% of major currency pair trading. Extended pairs, and their ETFs, include:

CURRENCY ETF THAT TRACKS THE BASE CURRENCY (ONE ON THE LEFT)

NZD/USD BNZ

EUR/USD FXE

AUD/USD FXA

Disclosure: Author has no positions in the above instruments