January 1, 2022
A Big Picture Look at Gold

A number of Factor Members have asked if the monthly Gold chart can be interpreted as a possible Cup and Handle pattern dating back to 2011 high. In fact, I completely accept this interpretation.  My only question is whether the Handle might extend longer and to lower levels or if the current shallow and brief Handle will be all the market experiences.  In the case of a shallow Handle we should be alert for a buy signal on weekly and daily charts.

The market has chopped since making a high at 2,063 (nearby futures) on Aug 7, 2020. The high in spot Gold on that date was 2,075. One thing is for sure IMO – a 17-month trading range of 20% (of the underlying value) starting at an all-time high is seldom bearish price behavior.

The current daily and weekly charts seem premature for a massive blast off at this time unless we label the period since the Mar 2021 low as a 5-point reversal symmetrical triangle. This is not an
ideal interpretation because the symmetrical triangle is not the most reliable chart pattern. While  his pattern is not likely to launch the completion of the 10-year Cup and Handle it could propel
prices to retest the 2020 high. That, in itself, would be a really good trade.

Among other traders, I have cast doubt on the possibilities of a $200-plus Gold rally to retest the 2020 high based on the profile of COT data – that Commercials hold an extreme short position while Specs hold an extreme short position. I am revising my thinking on this. Historically – across all commodities – extreme short positions by Commercials is a head-wind against a sustained advance. Yet, the last two “super” bull trends in Gold began with extreme short positioning by Commercials (see vertical red lines).

Commentary on open trade equity | unrealized profits (November 21, 2021 Report)

Unrealized profits are taken into account when calculating futures and forex trading profits for tax liability. Also, hedge fund managers calculate their performance based on closed trades in addition to changes in open equity (OTE) from one reporting period to the next.

Many traders monitor their asset balances, including unrealized profits/losses. While I report unrealized gains/losses in my annual tax statements, I ignore open trade equity in monitoring my Net Asset Value in real time. Open profits do not belong to me so why would I treat them as belong to me. The only Net Asset Value that I care about is Closed Trade Net Asset Value.

One of the tables/graphs I update regularly is my Closed Trade Net Asset Value – I have this figure going back to 1981 on a monthly basis and back to 2014 on a sequential closed trade basis. In my opinion, how a trader considers open profits can GREATLY impact their emotional state – which can impact their trading disposition. A couple of examples – one hypothetical and one real time – illustrate this.

• Hypothetical: This morning you had a $20,000 open profit in a futures contract but your trailing stop got hit, erasing $10,000 of the profit. In your mind do you think/feel that you lost $10,000 or that you made $10,000?

• Realtime: I would have to figure out the exact amount, but I ended the week with less equity in my Prop Account than I had at the beginning of the week. Yet, closed trades this past week had a composite profit of 80 basis points. So, who cares how much in open profits slipped through the cracks?

My focus (MY GOAL) is to keep advancing my Sequential Closed Trade NAV. The graph shown is for 2021 Futures/Forex/Crypto closed trades. For the purpose of this discussion the numeric values of the “Y” axis are unimportant. Of paramount importance to me is avoiding big losses so that the NAV curve is no more than a few good trades from a new ATH. Even right now I am in trades that based on current stop levels will push the NAV curve into a new ATH. In a nutshell, that’s my goal. I operate on the assumption which has proven itself to me that if I take care of losses, then winners will take care of themselves. Trading is about managing capital and risk. That I need to enter and close trades is simply the plumbing by which that occurs. It is the big losses (for me this is any loss greater than 30 BP per tranche) that screw up the calculus of trading.