With sentiment in the metals at extremes, and rightfully so, there is quite the potential for a squeeze to occur in these areas of the market. Structurally the best metal in the game remains Palladium, but from a tactical perspective I think that there is a huge potential for a move to the upside in both Gold and Platinum over the intermediate term.
First off, I want put sentiment in perspective for both of these metals.
1. Gold sentiment nearing YTD lows.
2. Gold hedging nearing YTD lows.
3. Platinum sentiment at 12 year lows.
4. Platinum hedging at 2 year lows.
Sentiment has been a trainwreck for most of these metals but price has not been able to get going enough to ignite a short covering rally of any significant magnitude. I think with the action we’re seeing in price is signaling that this time may be a bit different.
Structurally gold is a complete mess as it broke down below multi-year support at 1180. Despite sentiment being poor, it’s still not at the lows seen over the past few years so we want to be fading strength as long as we’re below 1180. If we get back above 1180, a more neutral stance is appropriate from a structural perspective.
1. Extended from 200 week SMA.
2. Positive momentum divergence developing.
3. Bullish candle off of a trendline from the ’04 lows (needs follow through).
Now that we know that we’re bearish structurally on gold, how does it look on the daily?
1. Basing above the 161.8% fibonacci extension of the October rally.
2. Bullish daily candle off of trendline support (as seen on weekly).
3. No positive divergence present (which is why I like Platinum more, see below).
4. A false breakdown confirms above the 1179.40 lows and targets 1240 and then 1275.
Gold is at an interesting crossroad here. I think if we break above the lows at 1179.40 we could see a move up toward the 1240 area for sure given where sentiment is at. I wish the daily had a positive divergence as well, but it doesn’t, which is why I’m more inclined to suggest Platinum. If we break back above 1180 you can be long with stops below that, targeting 1240 and 1275. If we fail to get upside follow through next week and we fail at 1180 I think you fade that move all day as structurally gold still acts awful.
Platinum looks awful structurally as well after breaking down below multi-year support in September which began with a false breakout that occured in July. Given where sentiment is at, a neutral stance is best given that we’ve achieved our first downside target at the 161.8% fibonacci extension of the December ’13 – July ’14 rally.
1. Price basing above the 161.8% fibonacci extension of the December ’13 – July ’14 rally.
2. Positive momentum divergence forming.
3. Price extended from its 200 week SMA (27% below).
Now that we know that we have a neutral stance on Platinum structurally, we can look at what additional data we can gather from the daily chart. I think that based on the factors below that from a tactical perspective, Platinum could be setting up for a swift move to the upside.
1. Price extended from 200 day (16% below).
2. Price basing above the 10/6 low with a nice candle on Friday (needs follow through).
3. Huge positive momentum divergence.
4. Clear low to trade against in terms of r/r (1186.50)
Given where prices are basing and the presence of a positive momentum divergence on both the weekly and daily timeframes, I think Platinum could be setting up for a nice move to the upside. With sentiment hitting new 12 year lows and prices being far extended from the mean (200 period sma) on both the weekly and daily, that only adds to my confidence in this trade. I think you could own all day above the October low of 1186.50, but we definitely want to see upside follow through next week to confirm these positive developments. Additionally, our price targets would be 1280 and 1320, both at which we’d re-evaluate if our thesis remains intact.
These are my thoughts on the metals. Feel free to share your thoughts with me on twitter or stocktwits @brunicharting.