Gold poised for take-off again or dead pussy-cat bounce?
Gold’s movement over Saturday and Sunday will tell whether Wednesday’s big sell off was built to force puny hands out of the market or if yesterday’s recovery was a dead pussy bounce.
Yesterday was an extraordinary day for Gold traders. First off, the volume for the CME’s most active gold contract, which is now April 2012, was 344,994 100 ounce contracts ( 34,499,400 oz was traded ) a record high. Gold prices dropped $77 per oz yesterday based mostly on a little unhappy news, particularly the absence of mentioning a probable QE3 by Fed Chairperson Ben Bernanke. Mr. Bernanke’s congressional affidavit does not change any of the fundamental reasons to own gold. On Wednesday, during floor and electronic trading, the gold price ranged from $1,792 on the high to $1,688 on the low, a $104 price difference. Surprisingly, all this happened and open interest increased by Five thousand contracts.
During my 50+ year career of trading gold I have seen similar exceptional days like this. Traders call this sort of day “shaking out the puny hands”, because many small speculators and stockholders are driven out of the market by stop loss sell orders and margin calls. So, who bought the 34 million ounces of gold and what will occur next? If the executives ( floor traders, commodity homes and hedge fund chiefs ) have control over the gold market they are going to clean out the tiny buyer with margin calls and stop loss sell orders.
Today, both in asia and Europe, gold rebounded back from the lows and held over the vital psychological $1,700 long term support level. The volume of gold contract trading was high with glorious physical demand.
At 11am PST, Gold is trading at $1,719.50 per ounce, significantly above the $1,700 support level and up $2.50 from yesterday simultaneously.
I think the $64000 question about Wednesdays dramatic drop and today’s gold trading is, is this truly a feeble hands clean out, or is this a “Dead Pussy Bounce” rally, within a gold market reversal?
I think that trading on today, Friday and Monday will tell the story. If gold can stay above crucial $1,700 per oz level by the end of Monday’s trading and with a little bit of luck rally above $1,725 per ounce, I think this will tell us it had been a clearing out of tiny investors and investors. From the other standpoint if gold stays below $1,700 per oz. and begins trading at $1,680 or below, that might imply that today’s rally was at “Dead Kitty Bounce”.