SPDR Gold Trust (ETF) (GLD): Buy This Low-Risk Pullback!

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It continues to be a good year for gold bugs and the SPDR Gold Trust (ETF) (NYSEARCA:GLD). And for would-be bullish traders of the battleground metal, short-term technical weakness and options in the GLD exchange-traded fund make for a strong, low-risk opportunity to ride gold’s building uptrend.

SPDR Gold Trust (ETF) (GLD): Buy This Low-Risk Pullback!

With the new normal in global markets, a bet on eternally low interest rates, elevated geopolitical attacks in 2016 and, let’s face it, the possibility for more systemic financial disruptions being heavily discounted at the moment — there’s plenty of reasons for the GLD ETF to continue rallying this year.

The largest potential threat to gold’s uptrend is the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP). As gold is traded in greenbacks, a widely held belief (when the logic fits) is to warn of the negative correlation between GLD and UUP, as dogma and proclaim foreign buyers won’t support gold if the currency is finding a bid.

Having said that, a cursory look at UUP should put the matter of oversimplifying this relationship with gold to rest.

Another reason to buy gold is a very supportive price chart offering the opportunity to buy the dip — and an options market in GLD to further define risk beyond what’s possible with buying the gold ETF.

GLD Daily Chart

072016-gld-daily-chart
Click to Enlarge
Source: Charts by TradingView

I last discussed GLD back on April 28 as it broke out of a continuation pattern. The date is denoted by the yellow highlight on the provided daily chart. While the rally was short-lived, a subsequent pullback did confirm gold’s uptrend and led to even higher prices.

Since hitting a Brexit-driven high, shares of GLD have declined near channel support of a second, smaller and steeper uptrend that’s developed over the past several weeks.

One technical caveat at this time is GLD is also facing an “all gaps get filled” situation. That may not bode well for bulls over the short term. However, unlike death and taxes, there are no guarantees this Wall Street adage will prove correct — despite the authoritarian declaration.

What this strategist can say right now is that bullish traders have the opportunity to buy on weakness in GLD stock at technical support within an oversold uptrend.

GLD Bullish Modified Butterfly Strategy

Wanting a position with as little risk as possible in GLD, but one able to yield a nice return in the event gold maintains its bullish bias and rallies to new, but not over-the-top highs — a modified September $128/$135/$140 long call butterfly is attractive.

Priced for $1.25, the strategy allows for a max profit of $5.75 at expiration if GLD lands at $135. That’s a return of 460% if gold rallies about 6.50%; an amount definitely possible without getting carried away.

More to the point, and without getting too excited about perfection, the construction of the GLD butterfly means $1.25 is the trader’s max risk.

Potentially — given very soft directional risk — if a technical stop loss was eventually used at lower GLD prices, the loss could be considerably less than the small debit to enter the position. That’s a nice bonus.

What’s also attractive is this GLD modified butterfly’s two embedded verticals are different widths. Unlike a regular butterfly, which would lose the debit above the highest strike, this GLD bull is still destined to make a profit of 75 cents, or return of 60% above $140.

Bottom line, that’s a nice guarantee to have in place if you’re trying to ride the trend in GLD and gold with as little risk as possible.

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.

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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 and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2016/07/gld-etf-spdr-gold-shares-buy-precious-pullback/.

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