I bought gold and the S+P in my short term trading accounts this past week. I had been short gold from Feb 8 until I covered the position May 14 (see May 21 commentary)…and several times during that three month period I recommended avoiding “The Mistake You Are Dying to Make – Buying Gold Shares Because They Were So Cheap.”
I thought gold was overdone to the downside when I covered my short position two weeks ago. It had fallen nearly $400 per ounce from its Sept 2011 highs (highs which I thought would be “The” highs for a long time) but I also thought that gold had been sold, particularly since late February, because it was perceived to be a “risk asset” and I thought it might morph into being seen (once again) as a “safe haven.”
Last week I thought that the “selling frenzy” that had hit asset markets since the beginning of May was getting overdone and since I was on the sidelines (with a clear mind) I wondered if there was money to be made by buying “risk assets”…but the challenge was “which ones?”
I was tempted to buy the EuroYen (while the Euro had been falling against the USD the Yen had been rising against the USD)…it represented a great opportunity to profit from a “snap-back” rally…but when I looked at the charts the EuroYen was in a strong downtrend…to buy into a strong downtrend would mean that I was putting on a trade because I thought the market SHOULD be doing something that it wasn’t…rarely a good trading strategy…so I passed on that idea.
.But the gold market was showing a “W” bottoming pattern…over a two week period…compared to the strong downtrend in the EuroYen… a much better signal of a change in trend…so I bought gold.
I also bought the S+P. It had been hit hard since the beginning of May and I liked the chart action on May 22 + 23 that created a “W” bottom…although not as strong a “W” as gold. I won’t stick around long if the S+P takes out last week’s lows but I could see the decline from the April highs as a correction to the uptrend that began last October…so if a rally gets started here it could run for a while.
Remember: these are short term speculative trades that I have made because I think I’ve seen a change in market psychology.
On the charts I see that gold has now bounced off the ~$1520 area three times…September and December of last year…and again two weeks ago. I had thought that if gold decisively broke below those levels it could set off a cascade of selling…and that may yet happen…so my initial long position is modest in size and I will take a small loss if it breaks those levels…remember…risk control…its only a trade.
For the past several months I have advised against buying gold shares because they were in a strong downtrend. The gold share indices made a “V” low the week of May 14 and have outperformed gold to the upside since. I understand the argument that gold shares or gold share indices represent a “higher beta” way to play a rally in gold…I don’t often trade shares or ETFs (I prefer trading futures and options rather than individual equities) but since I’ve bought gold I would rescind my caution against buying gold shares.
I was a gold bear for three months and now I’ve gone from bearish to bullish over a two week time period. That’s trading. And I may be stopped out of my long position tomorrow with a loss. That’s trading too. Or I may hold a long gold position (and/or a long S+P position) for the next few months. That’s what happens in markets, PERCEPTIONS change. And as the villain we love to hate, Gordon Gekko says in the 1987 movie, Wall Street, ” Money isn’t lost or made, its simply transferred from one PERCEPTION to another!”
Best wishes for good health and good trading,
Victor
Be sure to read Victor’s Absolutely Essential Rules for Trading Success HERE
