Gold has changed its tune of late. Instead of tumbling lower day after day, prices have actually stabilized nicely, suggesting a short-term low may have formed in the yellow metal.
And with Monday’s rip-roaring commodity rally, SPDR Gold Shares (GLD) staged their breakout attempt in months. While much work remains for the beaten-down metal before any type of sustainable uptrend can emerge, the action in recent weeks at least gives us an excuse to look for a rebound.
A brief review of GLD’s price chart reveals a trio of bullish developments worth note.
- An Inflection Point: The massive bullish engulfing candle on July 24 marked an inflection point for last month’s swan dive. The intraday bullish reversal was accompanied by high volume, lending credibility to the bottoming attempt.
- Selling Exhaustion: Since last month’s engulfing candle, distribution days have been absent in the GLD ETF. Furthermore, the price has been able to remain above the pivot low, suggesting that selling pressure has dried up for the time being.
- Breakout: Yesterday’s broad market rally delivered a breakout attempt in GLD over short-term resistance at $105.75. Though it wasn’t able to close decisively above the ceiling, any further push in the coming days should solidify the breakout bid.
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Given the rapidity of gold’s decline, little overhead resistance exists until GLD gets closer to the $110 level. This gives us a couple bucks of easy upside should GLD really begin to rebound in earnest.
A Golden Trade Idea
Sell the Sep $101/$97 put spread for 40 cents or better. Consider it a bet the gold ETF remains above $101 over the next month. While a sharp rally will deliver profits quickest to the short put spread, continued stability in the yellow metal is acceptable as well. Since the strategy has positive theta, time decay will help the position along.
The max reward is limited to the initial 40 cents credit and will be pocketed provided the put options expire worthless.
The max risk is limited to the distance between the strikes minus the net credit, or $3.60, and will be lost if GLD descends below $97. To minimize the loss, you could bail if it breaches the big support level looming near $100.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
