Gold bugs were granted a brief reprieve this week as prices of the yellow metal finally staged a respectable rally towards $1,200. While gold owners are hoping the slide in gold and gold stocks is over, the odds suggest otherwise.
Let’s take a deep dive into the charts and intermarket trends to see what’s in the offing for the gold market.
We begin with a look at the world’s premier gold proxy, the SPDR Gold Shares (NYSEARCA:GLD). GLD kicked off 2015 with a bang by climbing rapidly over the first few weeks of the year.
Unfortunately, all it’s done since is tumbled lower. A downtrend has taken root and has yet to be reversed, even after the recent rebound in gold.
With a declining 50-day moving average and multiple resistance levels (dotted red lines in chart) looming overhead, I suspect any further upside in gold will be limited in the short run.
Weakness in the U.S. dollar has aided gold during its recent bounce, but GLD won’t be able to count on this going forward. The fact is the dollar remains firmly entrenched in an uptrend and the recent drop was a run-of-the-mill, garden variety pullback for the greenback, nothing more.
It’s far too soon to declare the death of the dollar’s bull market and unfortunately renewed strength in the buck will more than likely lead to additional downside in gold.
To illustrate the ongoing relationship between GLD and the dollar, consider the chart below. The inverse relationship between the two is obvious. With a negative correlation of 0.93, the tendency of GLD to zig when the dollar zags is quite strong these days.
Fade the GLD ETF bounce with bear call spreads
My high probability option play of choice to exploit the next downturn in GLD, or at least its inability to rise much from current levels, is a May $121/$124 bear call spread.
Sell to open the May $121 call while buying to open the May $124 call for a net credit of 32 cents or better. Consider it a bet that GLD fails to rally above $121 by May expiration.
The maximum reward is limited to the initial 32-cent credit and will be captured if both call options expire out-of-the-money.
The maximum risk is limited to the distance between strikes minus the net credit, or $2.68, and will be lost if GLD sits above $124 at May expiration. To limit the loss you could exit if GLD rises to the short call strike of $121.
