Sell in May and go away? I don’t think so.
In fact, with the broader market showing some shaky legs in front of the historically seasonally bearish “worst six months,” the time could be right to establish a bullish position in SPDR Gold Trust (ETF) (NYSEARCA:GLD).
Let’s preface the case for Comex gold and the listed GLD ETF by stating that the commodity got clobbered Thursday. Not only that, the big news was the absolute lack of news or informational drivers to account for the 1.77% loss — other than one very late and lone report of US Weekly Claims data that suggested lower rates are good for gold.
Low interest rates are good for GLD? That’s news to us of course, as well as probably anyone with access to a chart of GLD. Simply look at what’s occurred in the past three-plus years while the fed funds rate has been at a near-zero rate of 0.13%. A fifth-grader can put that simple relationship together and realize lower rates are far from necessarily good for gold.
GLD Gone Buggy
The move in GLD gets only more bizarre from there. The PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) struck levels last seen in February and confirmed its downtrend. That type of price movement is supposed to support gold as it’s priced in dollars, making it more affordable to foreign buyers.
Also whacked figuratively and literally for GLD, a weak-of-late iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSEARCA:TLT) finished marginally higher, but only after notching a lower low and getting ever-closer to a first test of its 200-simple moving average in more than a year.
Finally, equity markets — spearheaded by the growth-centric PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) — stumbled by a bit more than 1.5%, with the QQQ testing its 50-day simple moving average.
Doesn’t anything matter to GLD buyers anymore?
With classic trading rules or props for gold seemingly tossed out the window, what’s in store next is anybody’s guess. But with the first rule of trading (“Don’t lose money!”) still in mind, let me explain why I see a golden opportunity for a limited risk, contrarian play in the GLD ETF.
GLD Monthly Chart
Looking at the monthly perspective and following Thursday’s bearish blitz by unknown market forces, GLD is at a key technical area of support for the fifth time in nearly two years.
Support offered from a 38% 2009-11 Fibonacci cycle and 50% level stemming from the 2005 10-year low was first tested in June 2013. However, subsequent tests and counter swings higher in GLD have gone on to establish a bearish-looking descending triangle.
Despite the ominous pattern, the presented bull case is focused on the two prior attempts to break lateral Fibonacci and pattern support last November and in March. Both technical breaches in GLD failed. Further, the most recent reversal led to a monthly hammer low candlestick backed by a bit of positive divergence in GLD’s stochastics.
The price action is far from perfect for bulls in GLD. However, the two failures (thus far at least) from a massive bearish pattern does warrant this self-described, pragmatic technician to view GLD bullishly and obviously as a contrarian at this point in time.
Better yet, GLD options are an absolute safe haven for traders of all persuasions given its superb liquidity characteristics, weeklies and one-point strike offerings. All those factors combine to offer a massive array of outrights and spreads from which to choose.
GLD July Long Call Strategy
Implieds and underlying GLD volatility are trading middle of the road in the low to mid-teens versus the past year’s range, though nearer to historic lows when examining the longer-term charts.
In wanting to embrace the “cheap enough” premiums and GLD’s larger chart without getting too buggy, purchasing a slightly out-of-the-money call, but waiting for a smidgeon of price confirmation (actually $1 in GLD) appears very reasonable for positioning.
One contract that fits the bill is the July $116 call for $2.10. As of Thursday’s close and shares of GLD at $113.48, the July $116 was priced at $2.12. The option’s delta is in the high 30’s and maintains gamma of 5. At last check in early Friday trade, GLD was lower again by about $1 to $112.45, so I like approaching this purchase should GLD manage to reverse back through Thursday’s closing price.
If this scenario transpires, the GLD call position has ample time to improve in price. At 79 calendar days out, time decay is negligible and long implied volatility isn’t much of a risk. The greatest challenge will be directional risk as contrarians are by no means out of the woods.
With Friday’s early action breaking below last week’s pivot low, I’d look to use Friday’s lows, which currently works out to a stop of approximately 1%. This would represent a money stop of about 15% to 20% of the long call price if triggered by a move to the upside in GLD.
Otherwise and if left unattended, were GLD to resume its downward trajectory and make the third attempt of a pattern break — the charm for bears — the call could lose upwards of 70% of its value on a test of the monthly lows — and of course, 100% if simply held to expiration and GLD remains below $116.
Disclosure: Investment accounts under Christopher Tyler’s management maintain a position in SLV, but does not currently own any other related positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
