Hourly Action In Gold From Trader Dan

Posted at 1:47 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

Extreme volatility was the standout today as a conflicted payrolls report had participants scrambling to assess the direction in which to place their bets.

Overnight, gold fell through strong support near $1365 plunging down towards $1350 in anticipation of a very strong jobs number. When the number failed to live up to the anticipated hype (remember that bizarre ADP number earlier this week), shorts scrambled for cover as buyers came back in. That buying took gold well off its worst levels (nearly $20) and back above $1365. It will need to hold this level to prevent another run lower towards $1345 – $1340. One can easily observe the battle around this critical level on the 15 minute bar chart.

JBGJ reports strong physical offtake in Asia on the move lower which is what will be needed to offset the fund liquidation and fresh short selling entering the market. The key will be whether the funds begin to liquidate or sit tight.

The selling in gold and across many of the commodity markets is coming from the notion that the US economy is slowly improving thus alleviating the need for much more in the way of the Fed’s QE2. I do not subscribe to that concept but there are enough adherents that it is engendering selling in many of the commodity markets. When we get a reminder of how tenuous any so called “recovery” in reality is, it tends to bring buying back into gold as sentiment shifts in favor of more QE for a prolonged period of time. In effect we are reduced to plucking petals on a daisy: “She loves me; she loves me not”; or more appropriately: “Ben will do more QE; Ben will not”. Depending on what market participants believe Ben will do, determines what direction our markets will go on any given day.

Keep watching copper and crude oil for a clue…

The Dollar is also having an effect on the overall commodity sector as it continues gaining support from an aversion to the Euro based on the sovereign debt woes in that zone. It also tends to move higher when we get generally positive news on the US economic front. It is necessary to keep in mind that today’s markets do not focus on the long term; algorithms are all short term oriented. The long term consequences of a $14 trillion debt load and continued money printing in an attempt to induce job creation are not going to be denied – short term however the crowd will get behind the effects of the liquidity creation of the Fed and the devil with the harm being done to the country and the next generation who are the ones who will have to bear the brunt of today’s borrow, print and spent policies. I have said it many times and will say so again; “The Chinese play chess while the US plays checkers”. The former has a 50 year plan; the latter has a 90 day window of forward looking”.

Back to gold – I like the fact that it has found buyers on its foray’s lower but it must get back above the 50 day moving average soon. As mentioned yesterday, the longer it stays below this level, the stronger the temptation is going to be for funds to begin cashing in on some of their longs. When the short term moving averages are trending lower and the market is below the 50 day, rallies are generally going to be sold. This is the reason that the bulls have to take price back above $1400 to engender a “buy the dip” mentality instead of a “sell the rally” one. Something will need to develop on the sentiment front to induce this move towards $1400 with the upcoming economic data being carefully scrutinized for clues to the Fed’s next move.

Oddly enough the market is right back at the level it was trading at the week of Christmas last year before it took off to the upside on some wild-eyed end of year buying which caught a lot of us by surprise. I had fully expected to see the selling that occurred earlier this week take place the last week of last year. I am still at a loss to explain what the deal was behind all that buying the last week of the year. Regardless, we do not want to see two consecutive closes below $1365.

Silver is flirting very dangerously with critical support near the $28.50 level. It is looking weak enough to break that level and move towards $28 which the friends of silver would not want to see violated as it would portend a break towards $27. Apparently the $30 level was too much for the grey metal in spite of the good technical finish it put in last year. Bulls need to perform quickly here.

I have been looking for some fresh money to hit the commodity markets with the advent of the New Year but so far that is not occurring. If anything, money is flowing out of the commodity sector for the time being. To me it does not look like a trend reversal in the sector overall but rather a loss of interest on the buy side which is allowing many of these markets to drift lower as longs liquidate and finally take those profits which I expected them to take last year. The fundamentals in the grains remain strong but they too are seeing some of this selling. Very few markets, only sugar that I can see for now, are escaping the selling telling us that it is broad based as exposure to commodities is being cut for the time being. If the play was to exit commodities and move to stocks, that sure does not appear to be what is happening today given the weakness in the S&P 500. It looks more like booking profits and moving to the sidelines to reassess what to do next.

From what I can see, a pattern is developing in which we are getting better US economic data but the status quo on job creation which is nil. Bernanke admitted much the same in his comments today. The result could be some choppy markets which are difficult to gauge as to short term trends. Just look at the bonds if you need any further proof. They are trading like some sort of damned yo-yo.

When risk is off the table, the bonds will tend to move higher as will the Japanese Yen. When risk is back on, the bonds will move lower as will the Yen. It is all quite maddening to get a decent read at such times and the best advice for traders is to trade smaller and run more quickly.  You are never going to be able to compete with the algorithms so learn to stay out of their way and let them chop someone else, including their own kind, to pieces while you wait for those longer term trends to reassert themselves. Markets in these choppy phases are extremely dangerous to trade so be careful.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini