Years ago I knew a floor trader who spoke of what he called the “third time lucky rule”. It means if a market tests a certain resistance point three times, a break above that point is often a good indicator of near term direction.
The reasoning was that after two or three tests of a resistance level, the market is more comfortable with this level and there would be fewer aggressive sellers. Kinda makes sense…
There is also the argument of buy stops being triggered once the market breaks above the resistance point thereby helping the market even higher. This is true too, although this alone does not make for a sustained move.
The “third time lucky rule” is a short-term or day trader’s concept, but it’s interesting to see it applied to Gold. The recent push higher shows the fourth test and subsequent break of resistance around the $1,000 level. What does that say for Gold?
As for spread trades, if you have recently watched my videos on Bull Spreads, you may be thinking does this create a bull spread opportunity?
For a bull spread, the answer is no. The spread between different Gold futures contracts stays very close to the cost of carry and tends not to blow out one way or another (also see video on Cost of Carry for explanation).
However, the Gold-Silver spread is of interest. You can see good moves occur in this spread. As the chart below shows, the spread has been moving counter to the seasonally bullish trend that is normally seen from mid-year through to mid-October.
So there is about a month or so left in bullish potential according to the seasonal data. This combined with a bullish outlook in Gold and what has been a weaker Gold:Silver ratio, suggests buying Gold and selling Silver might be a more risk friendly strategy that simply buying Gold.
Note, the above chart shows the Gold-Silver spread with a 1:1 ratio. The chart shows the ‘equity’ or contract value and is calculated such: (Gold * 100) – (Silver * 5000).
