Is the Gold Sell-off Overdone?
Today's Idea
Gold's swift and drastic sell-off could be seen as excessive and may trigger a round of bottom-picking among traders. Longer-term traders may wish to use the tumble in prices to reposition on the long side at more favorable pricing. Technically, the swift sell-off took-out several key technical levels, and the market closed below the 100-day moving average, which is often viewed as a turning point indicator in a trending market. The oversold technical conditions could trigger short-covering, suggesting some traders may possibly wish to explore testing the long side of the market. Given the market volatility, some traders may want to consider entering into an options strategy. However, there has also been an explosion in implied volatility, making options expensive. Some traders may possibly wish to explore entering into a bull call spread, or perhaps selling a put option outright, although the latter is extremely risky. One example of a bull call spread would be to buy the November 1750 call and sell the November 1800 call for a debit of 10.00, or $1000. The trade risks the initial cost for a maximum profit of $4,000 if the December futures contract closes above $1800.
Fundamentals
Gold has been one of the hardest hit commodities during the recent, broad-market sell-off. Many traders had become concerned that inflationary pressure would subside due to a grimmer economic outlook. Also, margin call pressure had a cascading effect on the commodities markets as a whole, including those that had strong market fundamentals. Europe remains the focal point for traders at the present time, as further weakening of the Eurozone could once again hammer commodities. The sell-off in Gold can be seen as a bit excessive in scope and speed, which may trigger value buying in the metal. If the situation in Europe reaches panic levels, Gold could see a wave of buyers coming into the market. Low growth forecasts without market panic setting in, however, could result in a short-lived rally.
Technical Notes
Technically, we see the December Gold contract confirming a double-top last week, falling below the 1745 level. This resulted in a violent sell-off that temporarily pushed prices below support at 1545 before rebounding a bit. The market did settle below both the 100-day moving average and 61.8% Fibonacci retracement level. Failure to hold rallies above these levels could result in further price declines. If the market is able to gain traction and close back above these levels, a reversal may ensue. The sharp market drop resulted in the RSI reaching oversold levels, which may provide the market support in the near-term and trigger value buying.
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