Action in the PM sector yesterday is suggestive of a short-term tradable reversal to the upside. Silver reversed after touching its intraday September panic low, a significant development, although it does not look like a convincing low - gold's looks more impressive - there was a clear bull hammer in gold, which after putting in a new intraday low in the early trade, managed to close above its September intraday low. Gold is now quite deeply oversold so there is certainly scope here for a significant rally. After dropping to new lows in the early trade, PM stocks indices bounced back sharply leaving behind bullish "piercing patterns" on their charts.
We should therefore close out at once the Put side of the straddle trade that we opened on 11th December just ahead of the recent plunge. Even after the mauling they suffered yesterday as a result of the reversal we are still well up on these Puts (Calls in the case of ZSL), between about 300% and 500%, so the trade has worked out pretty much according to our best expectations.
We will be looking at the latest COTs over the weekend with great interest, especially in view of the fact that the Gold Miners Bullish Percent Index dropped to an abysmally low 10.34% yesterday, which just by itself suggests that we are at or nearing a bottom. This is its lowest reading since "the end of the world" late in 2008 when it actually touched 0 - and all analysts are in agreement that it can't go lower than that.
Because gold and silver reversed yesterday almost exactly at their September panic lows, we are believed to have an excellent trading setup here for the nimble trader. Keep in mind that we not becoming all out bullish here, but the action yesterday does suggest that a significant tradable rally lies ahead, that could see gold (and stocks) rally back up towards the apex of the Triangles that they recently broke down from, and silver rally up to the breakout point of its recent Head-and-Shoulders continuation, with some chance that an important intermediate low has just been put in.
Here is a strategy that could pay off handsomely. We ditch the Puts from our straddle trade for a fat profit, as described above. We hang on to the Calls for a possible salvage operation where we may be able to recoup a percentage of the loss on them, which would be great on top of the big profit on the Puts. WE CLOSE OUT IMMEDIATELY ALL SHORT POSITIONS IN THE PM SECTOR, and REVERSE TO LONG, and bang in close stops beneath the intraday lows yesterday. This affords us the opportunity to benefit fully from an upcoming rally, while the tight stops protect from significant losses in the event that the sector heads south again.
Posted at 8.30 am EST on 3oth December.