GOLD: an educational walk-through of the past and current cycle

[Zack Zarr 5]

On this post, I will elaborate on my thoughts on the price movement on Gold over the past bearish and current bullish trend. This is a layer-by-layer (or onion-type) approach from the simple price action to much deeper and more educated analysis based on the COT data. As always, your feedback is highly appreciated.

The Gold chart and possible zones

On this simple Gold chart, I highlighted some of the areas which the price has shown strong reaction, either bearish (red boxes), bullish (green boxes) or consolidation type (curly brackets).

As you know, I am a big fan of understanding the Big Players thought process and decisions. So this is a game of me guessing what these players have done in the past. And yes, you can only guess based on this simple chart, nothing more!

It is not too difficult to imagine some Short Adding and Long Closing activity inside the red boxes and Long Adding and Short Closing activity inside the green boxes. I'd suggest you play along this game and make your guesses before looking at the next chart.

The next chart shows some of these activities.

The notes beside each box are the actual events that occurred based on the COT-legacy reports. If you want to learn more about these reports, I have published some posts on this forum (A Deep Dive into Commitment of Traders Data Analysis, Commitment of Traders Data Analysis- Data Meets the Chart, Commitment of Traders Data Analysis- Part 2)*

*Note: for some of these posts, you need our FREE membership accessible by singing up at the bottom of this page: https://bearbulltraders.com/forex-trading/

Some of these action by the Big Players are intuitive but some are not. In the following sections, the actual numbers based on these COT reports are shown on the chart. You will see how the action of these players affect the price.

COT-Legacy data and Gold chart

Chart below shows the actual number of Longs and Shorts added and closed by the Large Speculators (Non-commercials on COT report).

I suggest looking at the numbers in each zone and thinking about the implication of Big Players' decisions during the period of each zone.

For instance, you can see what Closing of 24K Longs and Adding 19K Shorts can do to the price if happens in a relatively short period time (see the second red box from the left side of the chart). 

Alternatively, these players can take their time in adding and closing their positions which results in a semi-flat (consolidation) type of zone shown by the arrows. 

One obvious action during the past few bullish weeks is the fast closing of Shorts on any chance (drop in the price). Important to note is that it all started at the big bullish candle near mid Oct 2018. The tabulated data below also shows these numbers:

It would be easier to look at the data graphically as shown below.

COT-Legacy data and Gold chart and exposures

You can see how fast the Large Speculators closed their Shorts from extremely high relative short exposure to extremely low short exposure (bottom chart). However, they have not added Longs as fast and this is important. It seems most price action has been due to the short positioning changes and not due to longs. In fact, these traders started adding long almost 6 weeks after they decided on closing their large number of short positions.

And such a late stage decision to add longs makes them very vulnerable to close longs upon any barrier along the way. The first action happened in the latest COT data on Jan 8th 2019 which they closed 11K longs. We know that the price went higher from that area but you can imagine they had their doubts near that zone which is why a consolidation type of zone was created. 

One last piece of information is to look at a longer term perspective and see if we can learn from Big Players' action in the past.

COT-Legacy data and Gold weekly chart and exposures

The weekly chart of Gold going back 5 years is shown below:

Looking at the short positioning of Large Speculators,  you can see that whenever they can come back from their high short exposure fairly quickly. and that has always caused sharp upward movement. However, on the long positioning side, they can either do it in a quick manner or take their time. Just look at their long positioning action during the early-2016 vs. early-2017 period. 

It seems that they decided to take their time in building long positions which is why we don't see a strong upward movement in the relative log exposure. But that means some upcoming drops in the price that allows them to benefit from some short term bearish action while building up longs. This is also what I will be doing in the next few months: taking advantage of short term bearish action while watching longs positions to find clues on where to add longs.

Note: some of these expected actions might have already happened but the delay in the COT data due to government shutdown does not allow us track them.

I will be posting some trade ideas based on this analysis on Gold. For now, I need to wait for more COT data and find clues on where to add shorts.

 

Good luck,

Zack

 

 

[Zack Zarr 5]

UPDATE:

Gold traders showed some large activities on their long and shorts over the last weeks of January based on most recent COT data. 

The chart shows it in a more clear way how the Large Speculators tried to take some profit from their longs while adding significant shorts

Over the first few weeks of 2019, these traders took profit on 23K of their longs while adding 26K shorts. But as you can see, their shorts ended up in loss when the price jumped even higher on the week of Jan 29th when they again added 26K more longs.

Interestingly enough, they didn't close those 26K shorts as of Jan 29th. It would be interesting to see if the recent jump was caused by closing all those shorts or they actually added more longs again!

For the time being, I still have my longs open since last Oct as I mentioned in this post (https://forums.bearbulltraders.com/topic/752-fx-weekly-technical-analysis-and-trade-setups-based-on-october-09-2018-cot-reports/).

I know that a downturn/ or some partial bearishness is coming. But I need to see some signs of serious bearishness on COT data (which is still delayed by three weeks due to government shutdown) before changing my mind on the Gold bullish action. 

 

Zack