The last Commitment of Traders Report by the CFTC showed, that large speculators are record short risk-insurance assets like gold, VIX and Treasuries. This positioning shows a return of risk-seeking sentiment by investors, as well as reaching for yield at the cost of risk by hedge funds.\
The positioning of large speculators in gold, for instance, is at its mst short for the past two years. This creates the potential for a short squeeze.
Technical picture: GOLD
Weekly chart
Gold is in a long-term downward trend that began in September 2011. On the weekly chart, however, we can see several technical signals that hint at a short- or mid-term reversal of the trend.
The DeMarker oscillator on the weekly chart forms a W-formation in oversold territory. On the chart and in the lower panel I have noted the past W- or M-formations, and the succeeding reversals in trend. In general, it takes two months for the short-term reversal to complete. Additionally, the signal is more reliable and more profitable when the bottoms of the W or the peaks of the M are closer together and more defined.
H4 chart
The probability of a reversal is heightened by an inverse head and shoulders formation on the H4 chart.
The price attempted to break out above the neckline around 1210, but failed and corrected to the downside. At a breakout and close above 1210 we expect the bullish scenario to play out and the inverse H&S to complete with a price target around 1259. Note that the price is likely to face significant resistance at 1250-1251, which is the 23,6% Fibonacci level. We recommend entering long positions around 1211.5, a bit above the 200-period MA.
S/L: 1207.2
Alternative scenario: The bullish scenario is conclusively rejected if the price fails to break out above the 1210 level for the third time.
Source: Bloomberg Finance L.P.
Chart: Used with permission of Bloomberg Finance L.P.
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