Murphy’s Law Rules
The IMC blog is holding an investment position in the April the platinum/gold spread from the equivalent of -$199.90 (premium gold). We doubled the size of the investment on December 29th at a price of -$176.50. This was done because the spread triggered a bullish trend change by making a two-day close above the declining 75-day Moving Average for the first time since the summer of 2014.
The ‘add-on’ position was to be risked to a two-day close back below the declining 75-day MA. That happened yesterday when the spread closed at -$230.90, resulting in a loss of -$5,440 per spread. Since this investment was initially being backed by $113k, it brings the value down to $107,560 and puts the breakeven level at -$145.50 (premium gold).
As fate would have it, yesterday’s exit occurred when the spread was less than a buck and a half away from the contract low. Perhaps this was the low. This is a good time to remind ourselves that it’s better to be out and wishing we were in, than to be in and wishing we were out.
Reload with New Parameters
So the breakout above the 75-day MA sucker-punched us. Therefore, we are going to slow the moving averages down even more for reentry parameters on the investment ‘add-on’ position.
The platinum/gold spread poked it’s head just above the declining 100-day MA on the last trading day of the year and immediately turned over, indicating that this is working as technical resistance. Therefore, we are now going to use a two-day close above the 100-day MA for the new trend change signal. This has not occurred since August of 2014.
Also, the December 31st bounce high of -$167.60 marked the high for the month and sets important near-term price resistance. A sustained close above this point would alter the bearish price structure.
Pushing Our Luck
While it is tempting to get right back into the ‘add-on’ position and risk a few dollars below the contract low, we are going to resist. There are two reasons for this. First, we already have a long investment position in place even though the bear market has not yet reversed. Adding to a position that is underwater is known as a Margin Call –I mean, Martingale– strategy that has led many to financial ruin in the futures market. The only reason we are comfortable with the current investment position in the platinum/gold spread is because we have taken the leverage out so we can endure any drawdown.
Secondly, the spread was driven back to the contract lows in response to that little stock market crash that happened over in China. Also, the US market started the year with the worst first week of the year in history. If things break open next week, the spread could drop even more and cause us to incur a bigger loss than we think we’d theoretically have by getting in here and risking just a few dollars more.
The long-term view for the platinum/gold spread is still bullish because of its history. The trick is to survive the outliers that happen before the eventual reversion to the mean. The higher the leverage, the lower the probability of survival. We have to survive before we can thrive.
Investment ‘Add-On’ Reentry Strategy:
For each April platinum/gold spread entered at equivalent of -$199.90 (premium gold), the IMC blog will add another on a two-day close above the declining 100-day MA or a one-day close above the December 31st bounce high of -$167.60. If filled, liquidate the ‘add-on’ position if the spread makes a two-day close below the 100-day MA.