While most traders in the U.S. were preparing for the upcoming Thanksgiving Holiday, an announcement late last Wednesday that Dubai World was asking its creditors for a six-month stay on payments on its estimated 60 billion debt sent markets into a tailspin during thin-market trading conditions. The initial reaction was to sell equities and commodities, both of which have been in bull markets since March. Ironically, the one place where funds did move was to the battered U.S. Dollar, which spiked higher on "safe haven" buying. Although holiday-shortened trading hours on Friday may have delayed the full effects of any market shake-out, there were signs that the initial panic may have already subsided, as commodity markets traded well off their worst levels by the end of Friday's trading session. In fact, some traders are looking for a rebound in commodities to start the week, as traders whose long positions were stopped-out during the sell-off re-establish their long positions as November comes to a close. In addition, analysts will focus on how retailers fared during the so called "Black Friday" start to the holiday shopping season. Should retail sales come in better than expected, it may give further credence to the improvement seen in recent economic reports and lend further evidence that the worst of the recession is now behind us. Hopefully, the Dubai debt crisis will not be the start of another worldwide credit crunch.
The "Thanksgiving Day sell-off" can be used as a lesson in market behavior when news hits during a time of low liquidity. Even firmly established market trends, like the current bull market in Gold, can be affected during a "flight to liquidity". December Gold has traded in a $60 plus trading range since the start of Friday's trading session, triggering sell-stops that have been accumulating from those holding long positions in this historic bull market. Some traders who want to explore alternatives for protecting a position against sudden sharp price moves, especially during less liquid trading sessions, may want to consider the futures options markets for strategies to help control risk. Using Gold as an example, a trader who is holding a long position in Gold but wants some downside protection should the market correct may want to possibly purchase a put option in Gold futures. The premium paid for the option is like the premium paid on an insurance policy, with the strike price selected acting like the deductible on the policy. So the closer the strike price to the current market price, the higher the premium paid. This allows a trader to determine the amount of risk he wishes to take, as well as limit the potential slippage that may occur by using a sell-stop order -- especially during off-peak trading hours.
Looking at the daily chart for February Gold, we notice that large outside day on the candlestick charts that occurred during Friday's sell-off. Though this type of market reaction can be construed as a potential reversal signal, one has to take into account the timing of the correction during a holiday-shortened session in the U.S. Some traders may look at the Friday shake-out as restoring some health back into the bull market , as weak longs were shaken-out during the price decline as sell-stops were triggered and those joining the bull market late were taken out of the market due to margin-related selling. The 14-day RSI, which hit a vastly overbought reading of 85.5 on Wednesday, has now moved to a moderately overbought reading of 75.50. Even the widely-watched 20-day moving average was not taken-out during Friday's selling rout -- which prevented a short-term selling signal from being triggered, which may have lent additional fuel to the sell-off. The 20-day MA , currently near the 1126.00 area, will now act as support for the February contract, with resistance found at Friday's contract highs of 1196.80.
Mike Zarembski, Senior Commodity Analyst