Gold Short Covering Rally Looks to Me Like It Will Continue

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The chart here is of GLD etf and shows projections of a continued advance up from the recent lows.

Since the lows over the last week or so, the rally in gold has been notably larger than any counter trend advance going back to the April highs.  So by this measure, the rally has overbalanced previous moves in the leg down, and indicates by objective measures that a larger phase of upward market movement may occur.

I have drawn lines on 3 of the major short covering moves off of lows over the last 2 years, and then projected them up from this August's low.  And we see what looks like an 10%+ move as realistic coming off of the current low if it holds.

The sentiment at this year's lows was at a historically extreme level and would argue for the possibility of a major low occurring here.

The Commitment of Traders data showed that large speculators went net short at the recent bottom, which is very rare in gold historically.  It does not mean that the low is in, but would indicate the possibility of a historically large amount of speculative short interest to unwind which could fuel major legs up in months to come.

Other precious metals look to me to be in similar set-up, and so this complex I view as having explosive potential.  Just based on the moves over the last couple years, there may still be 3:1 reward to risk using a stop below this month's low, if the rally were to continue and reach gains similar to the amounts of previous rallies in recent years.


Pete

VIX and SPY Bollinger Bands Suggest at Least a Minor Pullback is Right Ahead

The VIX has closed 2 days in a row below its lower bollinger band, which is not a common occurrence.

I have looked at this data and combined it as a filter in a few different ways with other data.  The message is consistently that in the past after similar occurrences there has been a relatively strong skew to the negative in the short term.

Over the next couple weeks the MAX loss has been greater than 2 times the MAX gain on average. 

However, in this LOW VOLATILITY environment, a strong skew does not really mean big price action.  So over the next couple weeks, the average decline to be expected from past data may be ~1.5%.

The cycle analysis timing that I use, also suggests that there may be 1-2 weeks of downward pressure still in stocks.  So these perspectives are consistent and would suggest weakness (or at least NOT strength) through roughly August options expiration.

There are enough divergences showing up here that I feel a high confidence that in the short to intermediate term the market may cool off and not make much more net gains for a few weeks.


I don't have much of a longer term perspective to offer from the data.  I would suggest that in the quest for investment yield, the odds seems to be tipping in favor of money flowing to bonds and away from stocks.

Bonds and notes have major short interest accumulated, and the SP500 dividend yield has fallen below very short term yields on Treasuries.  The suggestion here is that there may be money ready to flow back into bonds rather than piling into stocks on a breakout to new highs in the SP500.

For those who may have interest in commodities and currencies, there is much evidence in the underlying positions that we are quick approaching a commodity rally and probable decline in the US Dollar index.

Some notable markets with extreme short interest and probable sharp rallies to come are gold, silver, coffee, sugar, among others.

Oil actually is more the opposite.  It has come off of record long positions and extreme bullish sentiment, and so from a pairs trade perspective, a long gold/short oil trade may make sense.


Pete