Possible Short Cover Rally in Store for Gold

The price of August gold futures has been dropping every day for the past two weeks. One day during each of the past few weeks, the market gapped open lower and left two sizeable gaps behind. On Friday, June 28, 2013, the market again gapped open lower, below Thursday's low, but this time filled the gap and settled above Thursday's settlement. After rotating within a $1187.0 to $1197.0 balance for the first two hours of the pit session, the market began to rally for the rest of the day, finishing near the highs. Because the market has come off so sharply over the past two weeks, leaving two large gaps, it is possible that the market has become oversold and a short cover rally may occur. This is not a prediction, but it is a scenario that traders must keep in mind when they prepare to trade.

Late-Day Spike

After finding a $1210.0 to $1220.0 range to rotate in during much of the afternoon on Friday, the market rallied up to $1228.9 during the last hour of trading, leaving a $1222.0 to $1228.9 late-day spike up. Late-day spikes are a measuring stick after a market probes to a new level (high or low) late in the day. Whether the market accepts or rejects the late day spike is what we need to monitor for Monday, July 1, 2013.

If the market gains acceptance within - and builds value above - the late day spike, it may test the $1247.9 to $1270.7 gap above. It is not unusual for a market to need more than one attempt to fill large gaps.

If the market rejects the late day spike and trades below the afternoon balance range, it may re-enter the morning balance range. If the market builds value below the morning balance range, the next downside references on the monthly chart are $1174.7 and $1155.6.

aaa cqg 7-1.png

Joseph Souhlakis began his career in commodities in early 2000 when he took a clerk job at the NYMEX for MBF Clearing Corp. For more than three years, Souhlakis acted as risk and position manager for some of the most successful traders in the crude oil and heating oil pits. In 2003, he became a NYMEX member and began his trading career. Souhlakis remained as a house trader for MBF Clearing Corp. until January 2007 when he transitioned to an independent trader. In January 2008, he made the full-time switch from floor trader to electronic trading from home. Learn more about Souhlakis by visiting www.justjoecharts.com. Follow him on Twitter @JustJoeCharts.

Click to Start Your Free CQG IC Trial

Joseph Souhlakis Risk Disclosure:
By viewing this website, you fully understand and agree that all futures, equities, commodities and options markets are subject to numerous implicit and explicit risks, none of which JustJoeCharts can control or influence. You therefore acknowledge and agree that all investment decisions you may make are yours and yours alone and are made solely at your own risk. You should be aware of all the risks associated with trading and investing and you should seek advice from an independent financial advisor before making any trading or investing decisions. The risk of loss in trading futures, equities, commodities and options markets can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. Before deciding to trade and/or invest, you should carefully consider your objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not trade or invest money that you cannot afford to lose. You also agree to bear complete responsibility for your investment research and decisions and acknowledge that JUSTJOECHARTS has not and will not make any specific recommendations to you or any of its subscribers upon which you or any of them is entitled to rely.

CQG Disclaimer:
Trading and investment carry a high level of risk, and CQG, Inc. does not make any recommendations for buying or selling any financial instruments. We offer educational information on ways to use our sophisticated CQG trading tools, but it is up to our customers and other readers to make their own trading and investment decisions or to consult with a registered investment advisor. The opinions expressed here are solely those of the author and do not reflect the opinions of CQG, Inc. or its affiliates.