Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Was Mini Flash Crash Bearish for Gold?

Commodities / Gold and Silver 2014 Jan 17, 2014 - 11:20 AM GMT

By: Submissions

Commodities

Boris Mikanikrezai writes: Let me start by wishing you a very happy new year! I would like to go back on what happened on January 6, 2014.

February 2014 Gold Futures on January 6, 2014


Source: Nanex

COMEX gold futures plunged by $30 or about 3% from $1,245.50 to $1,212.60 within a minute between 10:14 a.m.33 and 10:15 a.m. EST. Gold prices recovered most of their losses after the volatility triggered a “Velocity Logic” event, resulting in a 10-second pause in COMEX February gold futures. By11:44 a.m. EST, U.S. gold futures for February delivery rebounded to $1,239.90.

As a reminder, Velocity Logic is a mechanism adopted by the CME (which owns the exchange), which has the ability to stop trading if it detects market movement up or down outside a predefined number of points within a predefined time.

Let’s examine what could have caused this mini flash crash?

A shock in economic data

The crash came about 14 minutes after the release of U.S. factory orders and ISM services index data. Factory orders rose by 1.8% in line with market expectations while ISM Non-Manufacturing PMI came at 53.0 below market expectations at 54.6. This does not seem to fit.

Fat finger

At the first glance, it could appear as such. However, the CME said in an email that “all trades stand and our technology performed as designed.” Moreover, the fact that we have already seen this kind of sharp moves several times suggests that the “fat finger” thesis is invalidated

Large order

A market participant aims to push the market down with a large order (perhaps to protect is substantial short position) and either he/she underestimates the lack of liquidity in the market or he/she is fully aware so he/she takes advantage of it. Interestingly, it is important to note that large speculators (as known as managed money) increased their short positions to a record 82,765 contracts short in the week toDecember 24 even if they reduced their short positions to 78,334 contracts in the week to December 31 according to CFTC reports.

Trading liquidation

A market participant such as a big hedge fund must liquidate a non-profitable long position to rebalance its investments.

Algorithmic Trading

Fast and sharp market movements and abnormally high volumes of COMEX gold trading suggest the involvement of algorithmic trading.

In one minute, 11,000 contracts traded while the average daily volume is 110,000 contracts. Even further, 4,200 contracts traded in just one second. To put this into perspective, recently we have already seen several times 1,000 contracts traded in one second (which is extremely high), triggering a momentary halt in the COMEX. So more than 4,000 contracts traded in one second is extremely rare and the fact that people are able to trade that much in this short period of time is quite perplexing.

I believe this is the most likely explanation even though I cannot prove it at this stage. Market participants, using similar algorithm programs, place orders at the same price because sell or buy signals are the result of computerized trading programs.

Mini Flash Crash= Bearish for the gold market?

At the first glance, it is tempting to view the retracement as a positive development, suggesting that market participants are not expecting further decline in gold prices. However, I suspect the retracement is just technical. From a technical perspective, it is important to note that the $1,180 level has been proven to be a strong support as it has been tested a couple of times in the recent past. As a matter of fact, we have already seen that following the conclusion of the December FOMC Meeting (December 18), when gold prices declined sharply from $1,244 per ounce to $1,187 per ounce on December 19, before rebounding sharply as the $1,180 was not broke.

However, these kinds of sharp moves affect negatively the confidence in the market traditionally, even though it retraces initially. Indeed, a rational investor tends to be out of the market place after surprising increased volatility and illogical moves. Interestingly, David Govett from Marex Spectron reported in his Bullion Thoughts that he “knows for a fact that an awful lot of people got stopped out of positions yesterday afternoon and those particular players will wait a long time before they get back in and are completely disgusted with the move. From a medium term perspective, this suggests that the gold market is not ready yet to recover as market participants are still worried about further market decline in prices. Since the beginning of 2013, the risk to gold is skewed to the downside.

In sum, this mini flash crash suggests a bearish development going forward.

Boris Mikanikrezai

Mikz Economics
http://mikzeconomics.com/

© 2014 Copyright Boris Mikanikrezai- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in