Attempt to Shake Gold Bugs Runs Into Wall of Buyers
October 5th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
We need to talk about stops and cranks.
Cranks are an attempt by large players to shake valuable fruit from the tree around strategic support and resistance levels.
In Insider Crimes, Funny Money and Options Rackets, I wrote:
Market makers will often drive down the price before the big move up… Just before a big move, they might run the stops, just under where you’ve drawn your support line, to scoop up a bunch of shares at a discount… Double and triple bottoms are built on the skulls of people who thought there were being smart by setting stops down near a 52 week low.
What I wrote above was referring to stocks, but this applies to anything that’s traded in realtime with leverage. Take gold from earlier today, for example. Here’s a 15 minute interval chart:
“How many times have I mentioned $721? I’ve lost track.”
There are stochastic crosses and then there are stochastic crosses. See that stochastic cross near the strategic $721 level. That’s about the best catching-a-falling knife gamble there is. Those kinds of gifts are rare. And no, it wasn’t a cross under 20, but knowing about $721 was the tipoff to see that cross as valid.
I don’t use stops or limit entries around critical levels. I’ve either got my finger on the trigger at market, or I’m not thinking about the thing anymore. I’ve seen so much nonsense happen with key levels, I simply don’t bother with automated orders at those times. (Did I buy on that cross? Nope. I spent my cash on the previous bounce. It hurt to watch that, mumbling, “Stochastic cross. $721. Shit.” to myself. I hope my wife was asleep. I actually thought it was going to really break down; authoritatively, below $715 or something. But when that sucker started to coil back up, the swindle became obvious pretty quickly. Crank attempt.)
Here’s the rule with trying to cut it too close with stops (getting out) and limit entries (getting in):
Limits: If the thing is eventually going to move against you, you’ll get filled. If the thing is going to move in your favor, your order will be dangling there, unfilled, as the price of whatever you’re trying to trade has run away much higher (or lower, for short). In my experience, missing out on long entry because I set the limit too low feels just about as bad as losing.
Stops: Don’t place stops right up against key support and resistance levels. The cranks around key levels can be attempts by larger players to trip stop orders in an attempt to send prices lower (higher for short). Here, they actually wanted to buy a lot of gold, so why not use a little bit of capital to free up more of it, sending the price lower first? It works the same for short, just in reverse. If They want to short the thing, They’ll crank it up over a key resistance and trick traders into thinking “Wee! It’s breaking out!” And guess what… Inverse that chart above and you’ve pretty much got the picture.
How many times have I mentioned $721? I’ve lost track. So, we got an intraday breach of $721 to $720.20, believe it or not, and then look at it. Guys who set their stops just under $721 got robbed. Market makers call this shaking the apple tree, running the stops or cranking the stops.
What’s the moral of the story? No, it’s not to learn how to read a stochastic oscillator and draw price supports on the chart.
Don’t trade. Diversify. Diversify. Diversify.
So, to everyone who’s not trading this pig: it looks like we’re back to range bound action, short term, as pressure builds for another try at $750.
One last check of the Magic 8 Ball… Yep, comes up the same as last time: believe in the power of the weekly ascending triangle, but to watch out below $721.
Wake me up over $750 or under $719.
Fret not, you will get your $719 ounces in the coming days or weeks. And welcome the santa rally and then cash out for the spring cleaning. Welcome to hyper inflation boys and girls.