Market Inconsistencies

There are times when the markets provide clues that act as leading indicators. Sometimes, something just doesn’t “feel right.” When I get that feeling, I find it’s best to step to the sidelines, at least temporarily.

In  Futures Market Forecaster, I recommended a long position in August gold on June 9 at $426.20, and we sold at $441.00 on June 24 for a gross profit of $1,480.00 per contract traded. I’ve since been asked why I recommended taking profits in this position.

I like the gold market–technically and fundamentally–for the long term for a number of reasons. I anticipate an eventual repeat of what happened in the 1970s; crude oil increased five-fold from $2.20 a barrel in 1971 to $11.50 a barrel in 1974, and gold also increased five-fold, from $35 an ounce to $180, in the same period. Since the 2001 lows, crude oil has quadrupled, while gold has moved in the same direction but at a slower pace. From the 2001 low around $250, gold has not quite doubled.

The per-ounce price of gold has a long way to go and the trend remains up; open interest (the number of outstanding contracts) continues to increase, also with a lot of room to climb. This is bullish.

So why did I recommend liquidating the position?

August Gold

One of the reasons for my buy signal on June 9 was the fact that gold began to rally while the dollar started to firm up versus the euro. The price of gold and the dollar typically move in opposite directions because gold is seen as a “safe haven” investment in uncertain times. The fact that gold was strengthening with a strengthening dollar was a leading indicator that gold prices were ready to surge.

September Euro

On Friday and again today, I’ve observed the opposite dynamic. In other words, the dollar has started to weaken versus the euro, yet gold has refused to move higher. I look at this as a potential leading indicator that gold prices are a bit tired–with the Relative Strength Indicator (RSI) for gold in overbought territory, a correction would not be out of the question. The euro bounce could certainly be of the dead-cat variety, and if gold merely moves sideways in the coming week or two this will alleviate the overbought RSI. This would be quite bullish. However, “When in doubt, get out” is a tried and true trading adage to which I subscribe. We can always get back in when the doubt is erased.

While on the topic of inconsistencies, here’s another. 

November Soybeans

On Friday, November soybeans closed at a new contract high, yet open interest (OI) dropped by 5,000. This is a potential danger signal. According to Open Interest Rule #3 from my book  Trading Commodities and Financial Futures: A Step by Step Guide to Mastering the Markets, “If prices are in an uptrend and OI is falling, this is a bearish sign. The old longs, the ‘smart money’ (after all they have been right to this point), are taking profits; they’re liquidating. They are replaced to some extent by new buyers who will not be as strong on balance, but the declining OI is an indication the weak shorts also are bailing. They will be replaced to an extent by new shorts who are stronger than the old shorts were.”

When in doubt, it’s better to get out. We can always get back in.
Finally, at the end of this week we’ll have a new “voice from the tomb” (VFTT) signal in the wheat market. VFTT has been perfect this year: three profits in the last three trades, and six in the last seven trades. The details of this program are provided in a special report available for new 
Futures Market Forecaster subscribers. If you’d like to learn more about  Futures Market Forecaster please  click here or visit

George Kleinman is editor of Commodities Trends.

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Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the “Holy Grail.” Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

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Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.