Hedge Funds Are Heavily Short Gold

by Poly, Zentrader

Nobody ever said riding gold would be easy and Friday was a perfect example of that. No doubt gold can be a heart-breaker and it’s obvious the short traders went after those who entered with Thursday’s break or who over-leveraged their hand. The newly minted longs from that bullish breakout of the ascending triangle were the target on that sell-off. Because it has been such a long grinding bear market, longs are still weak handed and skittish. That’s why we find all major rallies out of lows riddled with sharp 1-2 session sell-offs and it’s why Investors need to widen their horizon when trading it.

I mentioned in Thursday’s trade alert that we could expect a back-testing sell-off from that breakout, and that would be normal. But I did not expect to see anything more than a retest of the breakout line around $1,394. I certainly did not see a move all the way back into the ascending triangle. So next week will be an important week for gold because if this is a Left Translated Cycle, then Friday morning would certainly have marked the top of this Daily Cycle. In that case, gold will fall right through the bottom of this triangle pattern and not look back.

But I still don’t hold too much weight towards it; I’m acknowledging the possibility so we could prepare for it. I’m still treating this as a shakeout move that is part of a continuation higher. If you found Friday’s drop painful or you were selling into the drop then you were either not mentally prepared or over-leveraged. Technically the Cycle is fine and it has not dropped below any key level. Gold is still early being on Day 10 while still trading above the 10dma.

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The short interest represented mainly by hedge funds, are massively short the metals.  For the time being they remain in control of this market, so they are keen to protect their positions. Hedge funds are like sharks and until they smell “blood in the water” they will keep hunting the same meal. But as the Cycle moves too an extreme, the most adaptive of that group will sense the opportunity and will begin to quickly move to the other side of that trade. Hedge funds just want to make money and they will trade either side of any market. This is where the “bigger fish” realize that the money will be made going against the consensus and they will begin to feast on the vulnerability of the others.

That vulnerability is seen within the COT report, as it now shows this is the most explosive setup of the 12 year bull market. Once the market begins to move against the short interest, a classic short squeeze rally will unfold. That short squeeze will fuel the first half of the Investor Cycle to the point where the speculators begin to pile back onto the long side of the trade. This will feed upon itself and perpetuate the Cycle’s move from one extreme to the other.

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Friday’s drop left gold exactly where it started the week. The weekly candle shows indecision, not overly bearish or bullish at this point. From here we’re looking for a weekly close above $1,413 to confirm a Swing Low. To achieve this, Gold will need to rally next week to also make the Daily Cycle a Right Translated Cycle. So a move next week above $1,413 will confirm a RT Cycle and with that confirm that this is just week 2 of an Investor Cycle.

On the downside threat we have the outside potential of this Daily Cycle having topped and is now in the process of moving lower. If this were the case, then that ascending triangle break would have been a false move and a bull trap. The move lower would be confirmed with a close below $1,372 and a drop below the triangle. This would be a bad sign for gold, as it would certainly indicate that at least another retest of $1,321 is forthcoming. The fear is that it could result in another capitulation event with telling where it could end.

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The positive news for gold is how the miners responded to Friday’s sell-off. After a few very positive sessions leading into Friday, I would have expected the miners to really sell-off hard because of the broad equity and gold drop. Instead they held up remarkably well and the daily chart continues to look constructive. The fact that Friday was a “panic day” and the miners performed the best, this indicates that they finally have some underlining strength.

The miners have also put in their first two solid back to back weeks since September of 2012. Although again it’s still early, it does appear as if a decent “counter-trend” rally back to $33 (GDX) is now under-way. This is also the first good rally to come out of oversold low since July of 2012, so we know this is well overdue. I expect the $32.11 weekly gap to be filled quickly before a test of the trend-line could pose the first significant resistance and test.

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This as is an excerpt from Weekend’s premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. If you’d like to receive real time alerts as well as the most up to date reports, you may want to take their FREE 15-day trial to fully experience what they offer. Coupon code (ZEN) saves you 15%.