In our Trading Master Class this year, Dr Marc Faber advocated having commodities and precious metals in your investment portfolio and also using them as trading instruments.
Platinum is one of the metals he favours most. The World Platinum Investment Council expects platinum to be in deficit this year with demand exceeding supply by around 520,000 oz. The market is tightening for a number of reasons, including reduced capital investment by South African mines.
The platinum price is also historically low compared to gold. On average over the past 30 years, it took 1.36 oz. of gold to buy an ounce of platinum. Today you need only 0.77 oz. If you are interested in exploring these themes further, my colleague Michael McCarthy will be presenting a follow up seminar on Dr Faber’s Master Class next Tuesday. You can register here
Potential Double Bottom Pattern
What interests me about platinum today is a potential double bottom pattern
The US Bond sell-off has lost momentum this week. The market is making up its mind about whether to extend the sell off after a brief pause or stage a corrective rally. Precious metals are likely to follow this lead.
If bonds do start to rally, platinum looks a chance of getting a nice pop off this potential double bottom. To complete the pattern and potentially set the stage for a really major corrective up trend, platinum would need to break though the double bottom resistance around $1010. This looks a pretty significant level with the 200 day moving average not far above.
A common trading strategy for patterns like this is to buy soon after the second double bottom has been confirmed instead of waiting for the resistance to be broken.
This improves the potential payoff ratio of winning trades but stop loss management is important. The initial stop might be placed below the double bottom and then run up below new failure levels if a rally develops. If price gets to the resistance level, the stop can be tightened in case the rally fails at that point. Once the resistance is broken, the position can be run, looking for a larger rally to follow
Using the MACD
One key to a strategy like this is to base your entry strategy around something that provides an indication that the double bottom has been confirmed. Buying just because a double bottom level has been reached carries a much larger failure rate. As things currently stand, the recent low is being tested again and the sell-off could easily be extended. It’s also possible that platinum could drift a little lower before confirming a set up. The double bottoms don’t have to be at exactly the same price
MACD can be a useful confirmation tool. Right now it’s showing potential divergence. It might make a higher low while price is making flat lows. That’s encouraging.
The buy set up comes when MACD signals a trend change with the black MACD line crossing above the red signal line or the histogram bars moving above 0 and turning blue. On a big picture trade like this, it might pay to wait for the end of the trading day to confirm this. MACD is calculated on closing prices so you can’t be sure the buy signal will confirmed until the candle closes.