Gold: Rallying On Elevated Volatility
China decides to retaliate against the US on tariffs.
S&P sells off by almost 70 handles.
Gold though rallies over 1% on the announcement sending the yellow metal above $1300 an ounce.
Yesterday's market action in US equity markets once more demonstrated why it is so important to have a diversified portfolio in order to realize above-average gains. The S&P 500 dropped by 70 handles to finish the trading day at $2,811. As a result, the CBOE Volatility Index (VIX) popped above 20. The three ways we achieve diversification in our portfolio are:
Long-term dividend growth plays. These are your blue chips which spit out strong cash flows like clockwork every year from which we get paid handsomely through dividends. Volatility plays. When the VIX spikes, it makes sense to sell rich option premium on selected stocks or ETFs. Why? Because the risk/reward setup for the options seller becomes far more attractive when option premium is rich. Value Plays. These usually are the mid and small caps which are trading on the cheap. The great thing about these stocks is that many times they do not follow the market due to their depressed valuations. This again gives the portfolio diversification over the long term. Swing plays on Commodities. We aim to buy both yearly cycle lows and intermediate lows in commodities such as gold and oil. Although oil of late has been trading in a highly correlated fashion to equities, gold and the gold mining sector rallied hard yesterday as they were seen as safe havens once more.Many times in stocks and gold for example, these respective asset classes will use announcements such as the one we had yesterday concerning the ongoing trade war between the US and China to print hard tops and bottoms. For example, that heavy drop in the S&P yesterday along with the strong rally in gold may mean gold has confirmed a new intermediate cycle whereas stocks may have printed an intermediate top.
We have consistently stated that the next true buying opportunity (in the swing play section of our portfolio) would most likely come in precious metals. Therefore, let's have a look at the gold charts to see how they look at present.
We have been probing the long side in the precious metals sector for a while now. The principal reason being the sheer length of the present intermediate cycle (dates back to last August). If we look at the daily chart, we can see that we have a clear daily cycle low on the 2nd of May. Price now has closed above the down-cycle trend line as well as the 10-day moving average. Also the MACD lines have crossed over.
The question at the time though was whether this May 2nd low was also an intermediate low. Although we were expecting one, we definitely have been dubious over the past couple of weeks. The reason being that advances out of an intermediate low are usually very aggressive in nature. Although price has been going up in gold generally this month, we were looking for more of a confirmation.
Well, we may have received that confirmation yesterday (with that strong bullish candle) which rallied the price of gold above $1300 an ounce. Why? Because price yesterday closed above the 10-week moving average as well as the down-cycle weekly trend line. Furthermore, price has also completed a weekly swing. When you add these confirmations together with the fact that the May low took place 37 weeks after the August low, it looks like gold indeed has started a brand new intermediate cycle.
Therefore, we will continue to hold long positions in this asset class until we believe this intermediate cycle has run its course. More volatility in equity markets we feel will help precious metals positions here. Let's see how the rest of the week plays out.
----------------------
Elevation Code's blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays, swing plays or volatility plays. Trading a wide range of strategies gives us massive diversification which is key. We started with $100k. The portfolio will not stop until it reaches $1 million.
-----------------------
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Follow Individual Trader and get email alerts