While equities remain befuddled and incapable of choosing a direction and sticking with it, gold prices are soaring. The SPDR Gold Trust (ETF) (GLD) is up 10 of the past 12 trading sessions on growing volume.
With resistance levels giving way left and right, some may be wondering if the long and dark night for gold owners is finally coming to an end. Might the mighty gold bear have finally sated his appetite?
Perhaps. But let’s see what the charts reveal about gold’s sudden awakening.
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Since carving out a low near the magic century mark, GLD is up 10%. The ascent has accelerated this week with a pair of outsize up candles. Gold bugs can thank the greenback for the increased velocity. The U.S. dollar (not shown) is tumbling this week in one of its largest selloffs in months. The downturn is fueling strength in a handful of commodities, GLD included.
The ongoing rally in the SPDR Gold Shares has been sufficient in carrying the gold ETF back above its 200-day moving average. Though the 200-day MA has yet to turn higher, the 50- and 20-day moving averages have. Further bolstering the case for a golden comeback is the heavy volume accompanying GLD’s rise.
Now for the bad news: We’ve seen this movie before.
Gold’s downward march has been punctuated by a handful of recovery attempts, many of which carried the yellow metal back above its 200-day moving average. All boasted heavy volume. And, unfortunately, all ended in failure.
One level worth watching in the days ahead is the descending trendline that has capped all prior GLD rebounds. If we can rally significantly above that in the weeks ahead, it will mark a change in character and thus increase the odds that the gold recovery is the real deal.
Multiyear bear markets don’t often end without a few temper tantrums from sellers, so don’t be surprised to see a number of false starts, even if this does morph into some type of bottoming process.
A GLD Option Trade as Good as Gold
Options traders will be happy to note that demand for derivatives has been rising along side gold prices. GLD implied volatility has jumped to a six-month high, making option premiums fat for the slaughter.
Regardless of the bullish undertones in gold, chasing the ETF here seems like a bad idea. With the rally already long in the tooth and the aforementioned trendline looming closely overhead, now is as good a time as any for bears to defend their turf.
To exploit the elevated options premiums along with the overbought conditions consider selling a Mar $116/$120 call spread for 50 cents. The reward is limited to the initial 50 cents and will be captured if GLD sits below $116 at expiration.
The max risk is limited to the distance between strikes minus the 50 cents, or $3.50, and will be forfeited if the SPDR Gold Shares fund sits above $120 at expiration.
To reduce the loss, you could exit if GLD rises to the short strike of $116.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
