It has been a good year for gold bugs. Even better, 2016 is close to being more precious for the SPDR Gold Trust (ETF) (GLD) as factors on and off the charts conspire for a bullish trend to continue.
As a GLD or gold trader, you may be questioning whether the Federal Reserve will really remain as accommodative as Wednesday’s FOMC statement led investors to believe?
I don’t have carnal knowledge of monetary policy. Further, personally I think they’re nuts if they continue to pander to Wall Street. But right now, the Fed is helping support gold prices.
Secondly, and also important for GLD and gold: Will a joined-at-the-hip U.S. dollar (UUP) continue its descent away from the prior trendy and crowded “Almighty Dollar” favor it held from investors?
Again, this strategist can’t claim to have the answer. However, both factors along with the usual geopolitical risks lurking in the background do appear supportive of GLD and higher gold prices.
And if I may, the chart in GLD is as bullish as it’s looked in years.
GLD Stock Chart
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After several weeks of consolidating, GLD looks poised to break out and confirm a new uptrend — its first since forging a top back in 2011.
Gold, after an extremely overbought move marked by multiple upside gaps in February as GLD broke through its yearly downtrend line, has had time to digest and neutralize those gains. That’s good news.
Maybe even better — or at least very supportive — gold has put together a symmetrical triangle pattern. Symmetrical triangles are typically known as price continuation patterns. Thus — as a first-stage base after breaking above key downtrend resistance — a breakout pattern should be a powerful event for GLD.
GLD Long Call Strategy
Premiums — the price traders pay for buying a call and the purest limited-risk means to getting long GLD — are cheap right now. Plus, given the anticipation of a big upside move upon a breakout of GLD’s triangle, long calls look very attractive right now.
The June $123 GLD call is trading for $1.80 with units of the ETF near $119.90. My strategy would be to buy the contract at a slightly higher price as gold confirms a breakout of pattern resistance.
With a current and starting delta of 37, I’d look to pay somewhere between $2.15 and $2.25 for the June $123 call. By waiting, this should put GLD above triangle resistance, as well as the pattern’s inception and prior exhaustion high of $120.78 from early February.
Investment accounts under Christopher Tyler’s management do not currently GLD or the derivatives mentioned in this article, but positions may change at any time based on market conditions. 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.
