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Jun 12

The Coming Capitulation In Gold

You have to feel a little sorry for the gold bugs. It doesn’t matter what stocks, bonds, or currencies do, up or down, Gold just cannot catch a break. If you’d been away from your screen yesterday and I told you the Dow was set to open down 120pts, Bonds were breaking support, the Dollar was testing last week’s lows, and I asked you to guess where Gold was, chances are you’d have guessed up $15, maybe up $20. No such luck, it was down $20.

Gold bulls must be wondering what the hell has to happen for them to get some upside. What’s it going to take?┬áTherein lies the mindset from which capitulations develop, something I believe may be close now.

Here’s a continuous contract chart of Gold futures through to mid-April. Gold had already been in a steady six-month downtrend before a break of a major support level led to a huge $200 slide in 2 days. Many thought that move marked some kind of capitulation then, but I think what transpired since suggests worse is to come.

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To get the context of those moves and the psychology it creates let’s take a look at that move back in April via $GLD which can only trade in regular market hours. After a rough Thursday night futures session we gapped lower on Friday morning breaking that support level. If they weren’t already in, stops couldn’t even get triggered. The mindset is then one of ‘this is overdone, it’s now way oversold, I can’t sell it here, I’ll wait to see if it bounces.’

AlphaCapture

Oops. That gap, the move that occurred in the futures Sunday night, is nearly 6%, and it only got worse later.

AlphaCapture

I have long suspected there are many long-term holders of Gold who never budged an inch when we had that 2-day downdraft in mid-April. It was either side of a weekend, with perhaps the single largest part of the move as we’ve demonstrated happening in the futures that Sunday evening, that left many unable to act. There was also no official story or event that gave the talking heads their much needed explanation to be able to rationalize the move. That kind of action leads people to believe it was somehow unjustified, an aberration, like some kind of flash crash that over time gets corrected as prices revert to the mean.┬áLet’s turn to see what happened afterwards.

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Even though that might have felt like a capitulation at the time, I don’t think that’s it. I think it’s yet to happen and here’s why. When you have true capitulation, true fear, you will get subsequent upside that looks more like a V-shaped bottom, something where it’s resulted from an absolute vacuum. Something that demonstrates the buyers are buying without fear. They are as close to damn certain as they can be. Does that price action after mid-April look like confident buying to you? Gently tip-toeing higher in low volume then getting the hell out of the way at the first sign of fresh selling? I don’t see anything here that suggests we have in place what’s necessary to form a long term bottom. In fact, that 130-131 area looks like one very obvious stop loss level for every long out there.

It’s still possible it moves higher from here, but not probable. All the volume remains on down days, there’s no indication of exhaustion of sellers, none of any pent-up demand, and bear in mind this is all with a macro backdrop of equities starting to weaken along with bonds, as well as a weak dollar. Gold has had every opportunity and reason to rally but has failed to do so. That has to be frustrating for the bulls, they supposedly have conditions in their favor and yet still they can’t muster any response. These type of conditions are what I believe results in a true capitulation move. Capitulation is the act of giving up, it is the act of get me out i don’t care what price, just get me out, i’m done, i can’t take it anymore. I don’t think we’ve seen that yet, but it’s close.

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How far could it fall? No idea. But it’s pretty obvious from the long-term chart a 10-15% fall from here is perfectly possible before the next meaningful support level comes into view. What would make me wrong? Signs of a sustainable uptrend, some upside volume, and taking out the 10-week would be some kind of achievement.

By way of a footnote and disclaimer, please be aware, despite the title of this post, I am not in the practice of prediction when it comes to trading. I write to observe, discuss and inform, but when I trade I follow trends, and I don’t use price targets. I am currently short Gold futures as I have been since 4/5 and have documented in all my weekly updates. I believe a capitulation move is a real prospect but whether one transpires or not makes no difference to me whatsoever. I will exit my futures short whenever the trend is invalidated for my timeframe.

 

 

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    1. Jon Boorman

      Yes I get it, it’s oversold short-term, but those conditions can often last longer than people anticipate, and also note the title of the post is the coming capitulation, suggesting should we have one more wave down it would be likely be a final one that flushes out all the weak hands, the type of move from which sustainable rallies are built, so the conditions you point out actually support that case.

  1. kevin

    WOW great call. GLD down over 4% in premarket. Do you think it will go down more to enter a short position now? Thanks for your insights.

    1. Jon Boorman

      Thank you, but the answer is the same as always, I don’t know, it might, it might not, the thing with capitulation moves is they’re big, but they can also be over quickly, if you’re taking a trade once the move is already underway you just have to make sure the risk/reward is still something that you’re comfortable with, same as any other trade, where would you need to place the stop, what price tells you you’re wrong, is that risk worth it in relation to the potential reward? Only you can answer that.

      1. Kevin

        Thank you for the feedback. I will probably sit this one out – like you said it may be over quickly. I have really enjoyed your market insights. Thanks again.

  2. Nathan

    Hi Jon:

    I know its probably still early, but what signs will you be looking at to cover? And given the way your yen trade flipped from bearish to bullish, do you see gold flipping as well?

    Great trades. Am hoping to get started in trend following – if you don’t mind me asking: How did you start? Is this an automated system you follow? Your charts just have 2 moving averages on them. Nice and clean without any oversold oscillators!!

    1. Jon Boorman

      Thanks for the message. I’ll cover when the trend is invalidated. Yes, Gold will turn bullish eventually. I have no loyalty to either side, just trade with the trend.
      I got started by reading Van Tharp and Michael Covel, and working out what trading methodology best suited my style and personality. My futures system is mostly systematic, my stocks portfolio is more discretionary, I describe myself as a rules-based discretionary trader. Re the charts, a Van Tharp course made me question every indicator I use, take everything off and concentrate on what matters – price.

  1. Wednesday June 12 - Nenner says:

    […] Following Trader, whom I have been observing past several weeks: The Coming Capitulation In Gold The Coming Capitulation In Gold – Alpha Capture No price targets as such for the bottom, but we are close time […]

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